The Cavs and Phoenix Suns have reached an agreement in principle on the deal, which gives the Cavaliers two of the league's biggest superstars.
O'Neal will join Cleveland in exchange for center Ben Wallace, guard Sasha Pavlovic, a second-round draft pick (No. 46 overall in Thursday's draft) and cash, said the two people who spoke on condition of anonymity because the league still must approve the deal.
Yahoo! Sports first reported the deal.
The trade, which the sides had been discussing for months, gives the Suns financial flexibility in the future. O'Neal has just one season left on a $20 million contract and Wallace, who ended last season saying he may retire, is in the final year of a $14 million deal.
The Suns save $10 million on the deal, half of it by lowering their payroll below the luxury tax limit. They plan to buy out Pavlovic, who has $1.5 million of his $4.95 million contract guaranteed.
Phoenix, which also gets $500,000 in cash from the Cavs, might save even more if Wallace decides to accept a buyout. The big center reportedly is considering retirement after battling injuries the last few seasons.
Owner Robert Sarver, whose banking and real estate interests have suffered greatly in the economic downturn, said last Saturday that he didn't mind paying a luxury tax for a good team. But Phoenix failed to make the playoffs, and the Suns are in the midst of what amounts to a rebuilding effort.
In Cleveland, O'Neal could be the missing piece for James to win a first championship.
O'Neal's addition also provides Cleveland with some much needed size in its frontcourt. The Cavs couldn't stop Orlando center Dwight Howard in the Eastern Conference finals, losing the series in six games and seeing a 66-win regular season and deep playoff run come up short.
Cavaliers general manager Danny Ferry tried to acquire O'Neal before the trading deadline in February.
The Suns were a West-leading 34-14 when they acquired O'Neal in February 2008. He averaged 17.8 points and 8.4 rebounds last season and appeared in his 15th All-Star game, stealing the show with a goofy dance during pregame introductions at U.S. Airways Center.
Popular coach Mike D'Antoni, who reportedly pushed management to acquire Shaq, left at the end of O'Neal's first season. D'Antoni was replaced by Terry Porter, who was fired in midseason after a failed attempt to get the team to play better defense.
The Suns won one playoff game in O'Neal's 1½ seasons - and last spring they failed to qualify for the postseason for the first time since 2004.
Soon after the season ended, speculation began to grow that the club was looking to deal O'Neal while his trade value was still high.
The Suns might not be finished with big trades. All-Star Amare Stoudemire, who can opt out of his contract, also is being mentioned prominently in potential deals.
With James' potential free agency looming after next season, the Cavaliers feel an even greater sense of urgency to win the city's first pro sports championship since 1964. By bringing in O'Neal, they have again demonstrated to the 24-year-old James that they're willing to make bold moves while keeping themselves in good financial position.
If the O'Neal-James pairing doesn't work out, the Cavs might be able to trade the perennial All-Star next February and would have more money to spend in the Summer of 2010 on what is being called the greatest free agency class in league history.
James and O'Neal have known each other for years. When James was a high school phenom in Akron, Ohio, O'Neal attended one of his games and the two have remained close. James has often wondered what it would be like to play with a center of O'Neal's stature.
He's about to find out.