Updated from 2:26 p.m. EDT

Three months after announcing it would buy ATI Tech for $5.4 billion, Advanced Micro Devices ( AMD) put its cards on the table.

In the same breath that it announced the official completion of its merger with the Canadian graphics chipmaker, AMD unveiled its vision for a new generation of microprocessors.

AMD said the new class of processors, codenamed Fusion, will integrate both the CPU and the graphics capabilities on the same chip, and will be available by late 2008 or early 2009.

Fusion processors will provide significant improvements in performance-per-watt compared with current microprocessor architectures, and will offer the best user experience as advanced graphics becomes a more important part of computing, according to AMD.

Not that the news was a huge surprise: AMD executives had hinted since the deal's announcement about a vision of the future in which graphics are integrated directly onto the CPU.

But by unveiling details of the initiative and a specific timeline right off the bat, AMD showed that this innovative strategy played as much of a role in the $5.4 billion merger as the more practical, near-term consideration of acquiring ATI's chipset products.

Chipsets put AMD on a more equal footing with Intel ( INTC), which sells complete "platforms" consisting of a microprocessor and a chipset -- the component that shuttles the data into and out of the microprocessor.

Buying a complete package from one chipmaker allows PC vendors to save money by reducing the number of suppliers they use. It also improves the stability and serviceability of the overall machine, something especially important for PC vendors selling desktops and notebooks to large corporations.

In Wednesday's announcement, AMD said it would begin selling CPU and chipset-based platforms in 2007, with a focus on several key markets including commercial PCs, laptops and gaming and media PCs. AMD said it will be able to get its newest technology to market sooner by selling a complete platform, while providing better performance and, in the case of laptops, longer battery life.

"If they just wanted chipsets, I suppose they could have just bought a Taiwanese company," said Sangeeth Peruri, who covers semiconductors for Seligman Technology Group. Seligman has a position in Intel.

AMD has shown that innovation is at the heart of the company's strategy. Now the onus is on the company to prove that it can translate this innovation into a commercial success.

Peruri says the latest details of integrated processors are in line with his initial understanding of the rationale for the merger, and they don't ease his concern that AMD paid too much.

But combining the processor and graphics -- which Peruri believes AMD will do when it moves to manufacturing chips with 45-nanometer circuitry -- presents a lot of opportunity, albeit with significant execution challenges.

AMD has set an aggressive timeline to develop a new chip architecture while it simultaneously strives to integrate a company based in another country that has about one-third of AMD's employees.

Details of the Fusion processors -- aside from the codename and timeline -- are scant.

Technology analyst Rob Enderle says Fusion processors will initially be targeted at the low-end PC market, rather than as a replacement for the most leading-edge graphics chips, which are available as add-in cards for PCs today.

As a result, says Enderle, Fusion will compete head-on with Intel's graphics offering, in which graphics are integrated into the chipset.

According to Enderle, putting the graphics inside the microprocessor instead of in the chipsets can reduce costs and offer better overall system performance.

For notebook PCs, integrating the graphics inside the microprocessor could improve one of the biggest factors affecting battery life, says Enderle.

"Right now, in terms of power use for notebooks, the bigger draw of power is actually graphics, not the processor," he says.

That could be a boon to AMD, whose notebook chips have lagged Intel's.

But graphics chips are as complex as microprocessors, packing millions of transistors, and it remains to be seen how easily AMD will be able to integrate the two types of chips.

And as Atlantic Trust SteinRoe analyst Fred Weiss points out, integrating the graphics functionality directly into the CPU could put AMD's core microprocessor business at risk. Atlantic Trust has a position in Intel and graphics chipmaker Nvidia ( NVDA).

That's because the success of AMD's processors will hinge on staying on top of two separate product cycles: microprocessors and graphics. If AMD stumbles in developing graphics technology, its integrated processor will not be competitive with other offerings on the market.

"All of a sudden you can't sell your CPU because you've got the wrong graphics chip in it," says Weiss.

Shares of AMD closed Wednesday up 53 cents, or 2.6%, to $20.85.

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