Microsoft's board of directors is still weighing whether to adopt a hostile approach and nominate a proxy slate of directors to replace Yahoo's board, sweeten its cash-and-stock offer for Yahoo, or possibly walk away from the deal, the Journal said.
A Microsoft spokesman was not available for comment.
A Microsoft-imposed deadline for Yahoo to start talks on a final deal or face a proxy battle passed last Saturday. An announcement from Microsoft is expected later this week, the report said.
Microsoft, according to the report, has indicated it would be willing to raise its bid to as much as $33 per share but such an offer may still fall short of the $35 to $37 per share that Yahoo's major shareholders are looking for.
Meanwhile, Microsoft Chief Executive Steve Ballmer, who is also a member of the board, has appeared ready in recent days to abandon the offer since Yahoo and its major shareholders want significantly more money, according to the Journal.
Ballmer had said last week that Microsoft was considering walking away from the deal. But most Wall Street analysts dismiss this as a hardball negotiating tactic rather than a real threat to end its two-year-long pursuit of a deal.
The value of Microsoft's offer, originally valued at $44.6 billion at $31 a share, has fallen to $29.06 a share due to a drop in the value of Microsoft's stock.