Shares of L&H jumped $8, or 25 percent, to $40 today on the Brussels-based electronic exchange Easdaq following the announcement. L&H is also listed on the Nasdaq exchange, where it set a high of $52.5 in May 1996.
The two firms said that the $45 million deal was part of a broad technology sharing and cooperation arrangement.
Last November, Microsoft licensed L&H's automatic speech recognition and text-to-speech software for inclusion in future products.
No timetable was given for the delivery of speech-enabled Windows technology.
The statement said L&H would develop applications to currently available and future versions of Microsoft's speech application programming interface (SAPI). L&H will also continue to develop products for horizontal and vertical markets, such as the medical and legal sectors, and will embed speech applications into special-purpose hardware, the company said.
"For the past several years Microsoft has made great progress towards a vision of the personal computer that can interact with users via spoken language," Nathan Myhrvold, Microsoft's chief technology officer said in the statement.
"Through this alliance with Lernout & Hauspie we are taking a big leap forward in transforming that vision into reality," he added.
As part of the deal, Bernard Vergnes, chairman of Microsoft Europe, will take a seat on the board of Lernout & Hauspie.
Microsoft also said it was investing $53 million in the Flanders Language Valley Fund (FLV).
FLV, set up at the end of 1995, is dedicated to supporting companies to develop speech-based technologies and applications.
Patrick de Smedt, managing director of Microsoft Belgium, will take a seat on FLV's board of directors.
L&H was set up on the initiative of Jo Lernout and Pol Hauspie, the founders and main shareholders in Lernout & Hauspie.
Reuters contributed to this report