The ISP and new media giant claims the deal will allow advertisers to reach some 140m people online by combining its media properties with the Advertising.com network.
It also enables AOL to offer more performance-based advertising online, including paid-for-placement and additional multimedia options.
"The acquisition complements our search business and CPM-based relationships by strengthening our position in the pay-for-performance area of online advertising," said Ted Leonsis, vice-chairman of America Online and president of AOL's core service.
He added: "Advertising.com brings a new dimension to our advertising offerings, enabling us to more fully participate in the growth of performance-based advertising."
Advertising.com will have the funds for further growth as a result of the deal, according to Will Becker, managing director Europe at Advertising.com.
"It gives us the chance to increase our rate of growth and part of that will be access to capital. The AOL presence can help us enter new markets too."
He added: "Our focus for growth in search and affiliate marketing will continue."
Advertising.com will remain a separate brand and company while being an AOL subsidiary.
Aside from its network, Advertising.com offers ad delivery and optimisation tools.
The UK is the largest market in its European network and the company employs 55 staff in its London HQ. In 2003, Advertising.com reported a rise of almost 80 per cent in worldwide revenues, to $132m (£72.2m).
"Online advertising is showing very strong growth, and (this) acquisition underscores AOL's determination to strengthen its competitive position," said Jonathan Miller, chairman and CEO, America Online.
"Advertising.com has built a profitable, scalable and highly attractive business. This is a strategic move that will bolster AOL's advertising business."