Sendo had been suing Microsoft for the alleged theft of trade secrets, fraud and for conducting unfair competition -- charges which Microsoft had denied. The case had been proceeding in Texas, but has now been concluded with both parties denying "any and all" liability.
Full details of the settlement weren't immediately available on Monday. As part of the deal Microsoft is surrendering its 4 percent shareholding in Sendo.
Both parties have said they are happy with the settlement.
"With this action behind us, the company can now focus on its future development and growth," said Robert Pocknell, Sendo's group general counsel, in a statement.
"We're pleased with this resolution and look forward to continuing to collaborate with phone manufacturers to bring innovative products to mobile customers," Tom Burt, Microsoft's corporate vice president and deputy general counsel said.
Sendo and Microsoft became business partners in 1999. At that time, Sendo was designing a smartphone based on Microsoft's Smartphone 2002 platform (then called Stinger).
In November 2002 the two companies abruptly parted company. A month later Sendo filed its lawsuit in which it accused Microsoft of using the small company as a stepping-stone to gain entry into the lucrative mobile phone market.
"Microsoft provided Sendo's proprietary hardware expertise and trade secrets to low-cost original equipment manufacturers (OEMs) who would not otherwise have had the expertise to manufacture handsets that would use [Smartphone 2002], and used Sendo's carrier-customer relationships to establish its own contractual relationships," Sendo's original filing said.
"Microsoft used Sendo's knowledge and expertise to its benefit to gain direct entry into the burgeoning next-generation mobile phone market and then, after driving Sendo to the brink of bankruptcy, cut it out of the picture."
Microsoft had consistently denied Sendo's claims. Last year a Microsoft spokesman said that Sendo's allegations were "counter to our respect for intellectual property and to the value we place in our partnerships".