Sun has entered into a "broad cooperation agreement" with Microsoft and settled all outstanding litigation, the company announced today.

Microsoft will pay Sun $700 million to resolve all pending antitrust issues along with a further $900 million to resolve all patent issues.

Both companies have also agreed to pay royalties for each other's technologies with Microsoft making an up-front payment of $350 million and Sun making payments whenever it uses Microsoft's technology in its server products, it said.

Sun chairman and CEO Scott McNealy said that Microsoft could end up paying an additional $450 million as part of the agreement, "depending on the level of collaboration."

Technology wins, lawyers lose

After years of legal wrangling, Microsoft and Sun agreed not to sue each other regarding any past patent infringement claims and to begin negotiations for a patent cross-license agreement.

Declaring a new relationship between itself and Microsoft, Sun also said that the companies have agreed to enable their products to better work together and have entered agreements on patents and other issues.

The agreement includes technical collaboration, giving access to each other's server technology, as well as Sun's licensing of Microsoft's communications protocols and Microsoft support of some Sun products.

New cooperative era begins

The two companies will initially cooperate on Windows Server and Windows Client, but this could expand to include cooperation on email and database software. For example, engineers from both companies might work together on problems such as user identity management, allowing information to be more easily shared between Microsoft's Active Directory and Sun's Java System Identity Server identity management products.

Also under the agreement, Microsoft and Sun will work together to improve collaboration between the Java and .NET technologies, while Microsoft will be allowed to continue to provide product support for the Microsoft Java Virtual Machine in its products.

Sun will receive Windows Certification for its server products. The companies announced Windows certification for Sun's Xeon servers, effective immediately. Certification for Sun's Opteron-based servers is "moving forward," the companies said.

Sun also said that it has promoted its software head Jonathan Schwartz as the company's new president and chief operating officer.

Sun also announced that based on preliminary financial results, it expects revenue for its financial third quarter, which ended March 28, to be about $2.65 billion.

Net loss, excluding one-time items, is expected to be in the range of $750 million and $810 million. Excluding one-time items, which take into account cost of layoffs, net loss for the quarter would range between $200 million and $260 million. Sun will lay off about 3,300 people worldwide.