"My return to Bayer ... is the closing of a circle for me. I had a great and successful time here which I think back on with great pleasure. That played a role in my decision for Bayer," said the 33-year-old.
"But what convinced me above all was the excellent footballing potential of this young and attractive team," added Ballack, forced to miss Germany's World Cup campaign in South Africa due to an ankle injury.
Ballack was released on a free transfer at the end of the season by Chelsea, sparking a rush to sign the international playmaker, who has been capped 98 times for Germany.
Three Bundesliga clubs - Hamburg, Bayer Leverkusen and Wolfsburg - reportedly showed interest in the powerful midfielder, along with Liverpool and Tottenham in the Premier League and at least one Spanish outfit.
Both Hamburg and Wolfsburg offered Ballack more money, but he elected to go to his former club in what has been described in the German press as a "move from the heart."
Ballack played for Leverkusen between 1999 and 2002, scoring 27 goals before a move to Bayern Munich.
He also held talks with Real Madrid's new coach Jose Mourinho, but negotiations broke down as the Spanish giants were reportedly too slow to make a concrete offer.
Ballack, currently on holiday with his family in Sardinia, will sign the contract with Leverkusen when he returns, said German sports agency SID. His basic annual pay is set to be around €6 million but various bonuses will push up the total two-year deal to around €15 million, the report added.
Leverkusen's sporting director Rudi Völller said: "Our team will get a massive surge in quality with Michael Ballack. The fact he chose Bayer when we had much less financial clout than our competitors shows his emotional attachment to the team."
"Michael will be welcomed here in Leverkusen with open arms," said Bayer general manager Wolfgang Holzhauser.
After playing a prominent role for Chelsea in the Champions League, Ballack will ply his trade in the less high-profile Europa league next season, as Leverkusen, fourth in last season's Bundesliga, narrowly missed out on a Champions League spot.
Ballack was set to take the captain's armband in South Africa, but his World Cup dream died when he injured his ankle playing for Chelsea against Portsmouth in the FA Cup final at the end of May.
Following the injury, Uli Hoeneß, president of Bayern Munich, encouraged him to retire from international football.
However, former Germany coach Jürgen Klinsmann urged him to get over his World Cup injury heartbreak by focusing on the 2012 European Championship.