Microsoft is to pay Sun Microsystems $1.6bn to settle antitrust and patent issues.
The two companies have agreed to pay royalties for using each other's technology, with Microsoft making an upfront payment of $350m and Sun to make payments when this technology is incorporated into its server products.
Microsoft's payments include $700m for antitrust issues and $900m for patents.
Sun has also agreed to sign a licence for the Windows operating system communications protocol.
Microsoft will continue to provide support for the Microsoft Java Virtual Machine, and certify Sun's Xeon servers.
The two companies have also agreed to work together on Java and .Net technologies, and not to sue each other with respect to all past patent claims while entering into negotiations for cross-licence patents.
The lawsuit between the firms in the US will also be settled. Sun said it was happy that the agreements reached satisfied the objectives it was pursuing against Microsoft in Europe.
Scott McNealy, chairman and chief executive of Sun, said in a statement: "This agreement launches a new agreement between Sun and Microsoft. We look forward to this opportunity - it provides a framework for co-operation between Sun and Microsoft."
McNealy added that the agreement would benefit both Sun and Microsoft and stimulate demand for new server products.
Microsoft chief executive Steve Ballmer added in a statement: "Our companies will continue to compete hard, but this agreement creates a new basis for co-operation. This is a positive step forward for both Sun and Microsoft."
Separately, Sun announced today that it planned to axe 3,300 jobs and that Scott McNealy would stand down as president but continue as chief executive and chairman. Jonathan Schwartz will take over as president and chief operating officer.
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