The Gunners emerged as contenders to sign Ozil late last night, with the Germany international reportedly undergoing a medical at the national team training base earlier today.
If the report is accurate, it would mean Arsenal have smashed their club transfer record to sign the Bernabeu playmaker. Arsenal have not confirmed the transfer though, and neither have Real Madrid
The report claims Ozil has agreed a five-year deal running until 2018 worth around £130,000-a-week - a package that would make him the club's highest earner.
The move picked up pace following the completion of Gareth Bale's world record breaking switch to Real Madrid, with the Spanish giants keen to recoup some of the fee spent on the Welshman.
Arsenal reportedly made contact with Madrid over the German star last night, with a £40m fee quickly agreed allowing the Gunners to make Ozil an offer.
He underwent a medical in Germany, where he's currently based as Joachim Low's side prepare to face Austria in their latest World Cup qualifier.
It promises to be a busy conclusion to transfer deadline day for Arsene Wenger, with a move for Palermo keeper Emiliano Viviano also expected.
The report also claims they remain interested in winger Angel Di Maria - but the Argentina international is believed to be keen to stay in the Spanish capital.