NFL Network's Adam Schefter reports that Coles received a four-year, $28 million contract.
Houshmandzadeh landed a five-year, $40 million contract with the Seattle Seahawks on Tuesday, costing the Bengals their top wide receiver. They replaced him with Coles, who caught 70 passes last season but was released by the Jets last week.
"Clearly, Laveranues gives our passing game another proven weapon," Bengals head coach Marvin Lewis said in a statement. "He's been durable and reliable, with high production in catches, yards, yards-per-catch and touchdowns. He's also a passionate player, a guy who will bring a very positive chemistry to our locker room."
Coles also visited the Buffalo Bills last week, but he chose to come to Cincinnati, where he'll be the No. 2 receiver behind Chad Johnson.
"The Bengals were very aggressive right from the start in talking to us, and when a team makes you feel really wanted, that's a factor you're not going to ignore," Coles said in the statement. "They said, 'Let's get this worked out,' and we did.
"I'm excited. I'm coming off a pretty good year, but I know I can do better. Anytime you come into a situation with a quarterback like Carson Palmer, you're going to think you can bump up those numbers a little more."
Coles, a nine-year NFL veteran, has played in 137 games with the Jets (2000-02 and 2005-07) and Washington Redskins (2003-04). He has 20 career games of 100 or more receiving yards, and he holds the league record for most consecutive games with five or more catches, having posted 19 straight over the 2002 and 2003 seasons.
The Associated Press contributed to this report