Under the terms of the agreement, AOL will display paid listings by Pasadena, Calif.-based GoTo on the search-results page of AOL.com and Netscape Netcenter.
"They have several partnerships in place, but this is probably the largest that they've ever signed," said Matt Finick, an analyst with Thomas Weisel Partners.
GoTo, which sells search listings to advertisers, has 29,000 advertisers and second-quarter revenue of $21 million. The company gets paid when someone clicks on the link to the advertiser's Web site.
Finick said the new model will directly boost the company's revenue. GoTo's CEO, Ted Meisel, also emphasized how the deal will help the bottom line.
"We believe our advertisers will benefit from the quality and volume of the traffic from AOL's members," Meisel said in a statement. "Not only is this our largest affiliate deal to date, this agreement is important because it provides GoTo with the opportunity to generate significant upside."
Shares of GoTo closed at $23.31, up $3.81 per share, or 19.6 percent, from yesterday's closing price. This year, shares of the company have traded as high as $114.50 and as low as $10. Shares of AOL closed at $57.25, down 50 cents, or .90 percent.