NEW YORK (Fortune) - When Time Warner announces third-quarter earnings this week, analysts and investors will be looking for hard evidence that the media company's AOL unit has made progress in its effort to develop a Yahoo-like portal that can pull in boatloads of advertising revenue.

But in some ways, AOL already has pulled off something of a public-relations coup: Instead of talking about its declining subscriber base -- a reality that continues to dog its dial-up service -- pundits are talking about the huge number of users who visit its various sites, such as AOL Instant Messenger; its music content and its advertising potential.

And Wall Street is buzzing about the various companies that are said to be interested in taking a stake in AOL. Among the suitors: tech titans Google (up $15.58 to $373.75, Research) and Microsoft (up $0.17 to $25.70, Research).

AOL's return to relevance isn't just dumb luck. It is the result of a two-year effort to redefine the company. And the plan to build a portal -- and offer up AOL's rich content for free -- met with much resistance within the company.

AOL chief Jonathan Miller's initial efforts to stave off declines in AOL's core business hadn't panned out, and by 2003 the company was looking desperate.

Financial analysts started to suggest some unappealing options: Many wanted AOL simply to squeeze out as much cash from the profitable dial-up service for as long as it could until it faded out of existence.

Others thought Time Warner (up $0.19 to $17.94, Research) should unload the entire America Online operation to an Internet company such as InterActiveCorp. (Research) Time Warner also owns Fortune and CNN/Money and other media properties.

But Time Warner didn't want to sell at a deep discount. And company executives were reluctant—with good reason—to dump a unit that continued to generate $1 billion a year in free cash flow.

Then, an amazing thing happened: The online advertising market started to make a real comeback.

Big established marketers were turning to Yahoo to help move product and build brands. And a then-private company called Google was drawing big bucks by teaming up ad listings with consumers' online searches. But for AOL to capture some of that ad revenue, it would need to make some radical changes.

For example, AOL had been using a proprietary system called Rainman (remote automated information manager) for publishing advertisements on its sites.

It was unlike any other system in the industry -- AOL essentially grew up before the Internet did -- and that meant marketers had to recreate online ad programs especially for AOL.

But fewer advertisers wanted to bother now that AOL was no longer king of the 'Net. So Miller pushed company engineers in 2004 to convert AOL to a standard ad-publishing system, bringing it in line with the rest of the Internet world.

AOL was learning to woo marketers. But no matter what it did, it couldn't shake the underlying problem: the declining user base for the AOL service.

Yahoo and MSN's free content meant they could amass audiences dramatically larger than AOL's. By early 2004 a number of AOL executives had started pushing the concept of a free web portal with at least some unique AOL content.

They also began to examine ways of using the AOL-owned sites that already were out on the web, such as Moviefone and Instant Messenger, to drive traffic to aol.com. And to keep people coming back for more, perhaps AOL should offer a free e-mail service, like MSN's Hotmail, that required users to visit a home page to check their missives.

AOL purists resisted. Free e-mail, they argued, would cannibalize subscribers. (A lot of people hang on to AOL accounts just to maintain the same e-mail address they've had forever.)

AOL's content, some of it expensive to produce or acquire, sets it apart from broadband competitors, which offer little more than a pipeline to the Internet. And even the most optimistic forecasts for growth in ad revenue seemed unlikely to offset the losses in subscription revenue.

Nevertheless in July 2004, Miller decided to pursue a free-content strategy. And while it is too soon to tell whether AOL's portal strategy will pay off, competitors have already started to take notice.

Microsoft, which is building its own search engine to compete with Google, approached AOL about using the MSN search product.

AOL, which has a long-standing partnership with Google (AOL was an early investor and uses Google to power searches on its sites), agreed to listen to MSN's pitch and then suggested the parties explore additional ways to partner.

Parent companies Time Warner and Microsoft got involved, and soon the companies were discussing everything from shared sales calls to a joint venture.

Google expressed interest, and even approached cable operator Comcast about joining in a bid for part of AOL. (Yahoo also briefly sniffed around.)

For Google, a deal would secure its place as AOL's search engine, a relationship that now brings it about $100 million, or 3 percent of revenue. The companies all declined to comment.

But Time Warner executives are said to be open to any strategic deals that would help boost the valuation of AOL.

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