With the deal, Microsoft gains a company with deep expertise in speech recognition and the intersection of voice and data, an area of keen interest to the Redmond, Wash.-based software giant.
CNET News.com reported on Monday that a deal wasand expected to come this week.
The companies did not disclose the purchase price or other financial terms of the deal, which they said is expected to close in the second quarter of the year. Earlier this week, The Wall Street Journal reported that the Tellme was expected to fetch $800 million.
There are many ways that Microsoft could incorporate Tellme's technology, ranging from its work in unifying business telephony and e-mail systems, to adding speech technology to existing software to bulking up its Live Search for mobile phones. The company also said it will build a platform on which other developers will be able to build speech-based applications.
"We've made great strides in speech technologies, but have only scratched the surface of what is possible," Microsoft Business Division President Jeff Raikes said in a statement. "The acquisition of Tellme will bolster Microsoft's existing speech capabilities, bringing both immediate and longer-term value to our customers and partners."
Much of Tellme's recent work has focused on mobile devices. The company recently started testing a cell phone application that allows people to say the information they are looking for and have data sent to their phone. A second service, also in testing, allows people to send a text message with a search query and have the result sent back via text message.
In an interview earlier this month, Raikesthe role mobile devices will play in Microsoft's plans, as well as the potential for merging voice and data, but declined to comment specifically on speculation that the company would acquire Tellme.
Raikes and Tellme CEO Mike McCue on Wednesday talked up fundamental changes that speech recognition can bring to the telephone, a device that has changed relatively little in decades.
"This in many ways to me represents dial tone 2.0," McCue said in a conference call with reporters.
Tellme was seen as a potential target for an initial public offering last year, though it never ended up filing for a stock sale. More recently, the company has been the subject of takeover rumors, including reports that it would be bought by Google or Microsoft.
Whether to pursue going public or being acquired is a big question for start-ups, according to Kevin Harvey, a partner at major Tellme investor Benchmark Capital.
"In Tellme's case, the team has a very broad and expansive vision for the collision of voice and information services," Harvey said Wednesday. "I think ultimately, it was clear that (the question) could be more fulfilled in the context of Microsoft...the company clearly did have the financial performance that it needed for an IPO."
Mountain View, Calif.-based Tellme, which has 320 employees, is profitable and has raised more than $230 million through several rounds of venture capital, the last of which came in October 2000. Former Microsoft executive Brad Silverberg was.
Microsoft said that it expects Tellme's executives and staff to join Microsoft following the deal's close and added that it plans to maintain Tellme's existing services.
In addition to directly operating a voice portal for consumers, Tellme's technology is used by large companies such as FedEx, American Airlines and American Express to power their automated telephone systems. During the conference call, Raikes and McCue noted that half of all directory assistance calls are made using Tellme's technology, meaning that one in three Americans use its technology each year.
Although Tellme will become part of Raikes' business software unit, Microsoft also plans to tap the technology to bolster its competition against Google and others in the mobile search business. "It's going to extend broadly across the company," Raikes said.
Asked whether the Tellme deal could mark the start of a new spending spree for Microsoft in the search arena, Raikes did not go into detail, but said "We're always looking at acquisitions that can help bring great people to Microsoft."