Microsoft has acquired e-mail and desktop search specialists Lookout Software. The two-person company offers a "personal search engine" that adds a search bar to Outlook that allows users to quickly and easily search through their e-mail and their computer.

The acquisition brings Microsoft more expertise in the area of search. Lookout developer Mike Belshe will join Microsoft's MSN search team. Details of the transaction were not disclosed. The deal closed at the end of June, said Eric Hahn, creator of the first Lookout product and founder and financier of Lookout Software. "This was a very lucrative transaction for us and we're very happy about it," Hahn said.

Microsoft did not provide details about how it would use the Lookout technology. However, Hahn said the acquisition is part of a much larger search strategy at the software giant. "Search has just taken over our industry as the must-have feature, whether it is Web, desktop or e-mail," Hahn said. "Lookout is not the silver bullet, but it is really good in e-mail and desktop search and those are critical parts."

Asked if Microsoft could use Lookout's technology to improve Hotmail, its Web-based e-mail service, Hahn said the technology would not work in that area, but that the general idea behind Lookout would. "The code of Lookout would not map to Hotmail today. However, the semantics and the experiences we have had are very applicable," he said.

Yahoo said last week that it had acquired San Francisco startup Oddpost. The company provides a Web-based e-mail service with a user interface that functions more like a desktop program, where users can drag and drop e-mails into folders. The company said it will use the technology in an upcoming version of Yahoo Mail. Google is also entering the Web-based e-mail market, with the upcoming Gmail.

Lookout started as a pet project of Hahn, a developer and venture capitalist in Palo Alto. Overwhelmed with the amount of e-mail he was receiving and keen to start coding again, Hahn set about creating a search tool for his inbox. He picked Microsoft's .Net platform and C# programming language for the project

The first version of the Lookout software, then called Chrome, was made available for download in May of last year. Belshe joined in October and improved the software, which was renamed Lookout. About 100,000 people use it today, and they will be able to continue using the product, Hahn said.

Microsoft is currently working on a brand new Internet search engine, scheduled for launch within a year, and recently revamped its current MSN Search website. Microsoft has also said it plans to launch search services for news and Web logs later this year.