Microsoft (MSFT) is close to buying TellMe Networks, a voice recognition startup headquartered just down the road from Microsoft’s Silicon Valley campus in Mountain View, according to this CNET report. It’s an interesting development and not a huge surprise to Business 2.0 readers who saw Jeanette Borzo’s What Works piece earlier this year on why the voice recognition space is heating up.

TellMe has been around quite a while; I remember covering the company more than five years ago when next-generation voice recognition services were first coming onto the scene. Since then, TellMe has worked closely with AT&T (T) and others to push voice technology forward. (AT&T took a $60 million stake in TellMe back in 2000, so if a deal goes through, the telco could be one of the investors that makes good.)

The potential Microsoft/TellMe connection is particularly interesting these days because of the challenges the cell phone interface presents.

It’s much harder to get information in and out of a cell phone than a PC, since phones have tiny keypads and screens. Voice recognition could potentially improve the situation, by providing another input method.

TellMe’s software might well be up to that level of challenge; as our piece points out, the software is constantly learning. It captured some 10 billion utterances each year serving clients such as E-Trade financial, which uses it to field about 50,000 calls each day.