The union made the first proposal, asking to retain the current "soft" salary-cap system but with a half-billion dollar reduction in salaries -- $100 million in each of the next five years in a proposed five-year agreement, according to a source who was briefed on the negotiations.

The owners, who are asking for a 10-year agreement, then came back with a counterproposal of their own. Owners offered what they called a "flex cap" system that would earmark at least $2 billion per season toward player salaries.

The owners also moved their position on cap exceptions, saying the Larry Bird Exception and the mid-level exception would remain in a new system, although teams could not exceed an as-yet-determined maximum team salary.

The sides agreed to meet again Friday in New York.

"We both made real moves, but we're still very far apart," union attorney Jeffrey Kessler said.

Commissioner David Stern called the league's offer "virtually the best shot we think we have" to avoid a work stoppage. He refused to call this his last offer, but said the "cupboard is getting barer and barer."

"It's all out there," he said. "The owners to a person feel that this is what we have to give."

The "flex cap" system had been brought up in prior discussions between the sides but was never formally proposed. That changed when the owners came out of their caucus late in the bargaining session, which was held across the street from league headquarters.

"We would have liked to have seen more, but we thought it was directionally better than what we had before," said Stern, who labeled the players' $500 million giveback "modest."

Under the owners' new proposal, the luxury tax would be eliminated and players would give back the 8 percent "escrow tax" that is currently withheld from all NBA paychecks. The financial terms would evolve over the first few years of the agreement.

"We're prepared to take less in the early years of a 10-year deal because we would come out in the latter years with something we are satisfied with," deputy NBA commissioner Adam Silver said.

Stern said the average NBA salary would drop to about $5 million, and that the owners are still seeking a 50-50 split of basketball-related income, which would be recalculated under the new deal. Silver said the owners' new proposal looks like the NHL's labor agreement and less like the NFL's "hard cap" system. It targets a "mid-point" payroll for all 30 teams of $62 million.