Updated from 2:32 p.m. EST

For the past year, Advanced Micro Devices ( AMD) has been making headlines by wooing customers once loyal to Intel ( INTC).

On Monday, it was Intel's turn to brag about a new customer, announcing that Sun Microsystems ( SUNW) will begin using its Xeon microprocessors in certain servers and workstations.

In a joint announcement, Sun CEO Jonathan Schwartz and Intel CEO Paul Otellini unveiled the partnership, which will see Sun ship dual-processor servers featuring Intel's Xeon late in the first half of 2007. The Intel-based systems will supplement, rather than replace, Sun's current lineup of servers featuring AMD Opteron servers, as well as Sun machines featuring the company's own Sparc processor.

The deal with Sun represents a drop in the bucket for Intel's $35.4 billion in annual sales. But it makes a strong statement that Intel's technology is once again in demand.

Intel unveiled a new line of processors for servers and desktop and notebook PCs last summer, hoping to reverse share gains by AMD, which has invaded once-exclusive Intel accounts like Dell ( DELL) .

The news had little impact on Intel's stock, which closed off 3 cents to $20.79, but AMD shares finished 1.1% lower to $17.53.

Shares of Sun closed off 2 cents to $5.75.

AMD issued a statement saying that it was not troubled by the Sun/Intel announcement.

"With one of the largest portfolios of AMD processor-based systems, Sun is a strong, strategic partner to AMD, and it is in the process of optimizing platforms for the mid-year launch of our new architecture and native quad-core "Barcelona" processor," AMD Chief Marketing Officer Henri Richard said.

For Sun, which has been taking steps to alter its business model in the wake of the dot-com crash several years ago, the deal gives momentum to the Solaris operating system and Sun's new line of servers featuring industry standard, x86 chips.

Sun made its Solaris operating system open source and free last year, and the software has so far has racked up more than 7 million downloads, according to Schwartz.

As part of the deal, Intel will support the Solaris operating system, dedicating R&D resources to ensure that the software is optimized to run on Intel's hardware, and distribute Solaris through its sales channels.

"This is an enormous expansion of the market potential because we can leverage Intel's brand, Intel's reach," said Schwartz.

"Solaris just running on Sparc systems, or just running on AMD systems, misses the majority of the marketplace," he said.

Schwartz, who replaced Sun co-founder Scott McNealy as CEO in April, said one of his first acts as CEO was to call Intel's Otellini to discuss ways for the two companies to work together. The new partnership was apparently hatched between the two CEOs at a dinner at San Francisco's Delfina restaurant.

While the two companies have a history of both rivalry and cooperating in the past, Schwartz said Intel and Sun now see the potential for a mutually beneficial relationship.

"We've had a bit of an ebb and flow in our relationship, and we've only been detecting flow in the past six months, and we want to continue that going forward," Schwartz said.

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