The contract also includes a club option for 2013.
Balfour, a 33-year-old right-hander, had a 2.28 ERA for Tampa Bay last season, but has had trouble finding the right fit this winter because he was a Type A free agent. Several interested teams backed off because signing him would have required them to give up their first-round draft pick this spring.
The A's, however, are not one of those teams. Because they ranked in the bottom half of all teams based on their won-lost record last season, they will lose only a second-round pick. They also agreed not to offer arbitration to Balfour at the end of his contract, meaning a club signing Balfour would not have to surrender a compensation pick in his next deal.
In the past three seasons, Balfour has struck out 207 hitters in 181 innings, the third-best strikeout rate (10.29 per nine innings) of any American League reliever.
He also allowed just 130 hits in those 181 innings -- the second-best rate among AL right-handed relievers who pitched as many innings as he did, behind only Mariano Rivera of the Yankees.
The signing of Balfour adds to Oakland's impressive bullpen depth, gives the A's protection in the event that closer Andrew Bailey and set-up man Joey Devine are slow to bounce back from injuries, and stands as yet another significant move in an aggressive offseason.
The A's have now added Balfour, Rich Harden and Brandon McCarthy to what was already one of the best pitching staffs in the American League. And they've upgraded their lineup with the signing of DH Hideki Matsui and trades for outfielders Josh Willingham and David DeJesus.
Balfour, meanwhile, becomes the fifth key member of Tampa Bay's 2010 bullpen to sign elsewhere this winter. But because of those departures, plus those of free agents Carl Crawford and Carlos Pena, the Rays now have amassed 10 draft picks before the second round this spring.
Information from ESPN The Magazine senior writer Buster Olney was used in this report.