The Redmond giant will provide Xandros users with a patent covenant that protects users from intellectual property claims.
Microsoft will provide the patent licence directly to the end user, which allows it to circumvent patent licensing requirements in the General Public Licence (GPL) which governs Linux.
Both companies said that they will collaborate to improve interoperability between Xandros and Microsoft software for servers and systems management.
Xandros will also join Microsoft in building tools that translate between the Open Document Format and Microsoft's Open XML.
Xandros is best known as a desktop Linux distribution. The firm started shipping a server version of its operating system in April 2006, but its market share ranks far below that of Red Hat and Novell.
The company unveiled Xandros BridgeWays in March, a management tool that supports systems including the major Linux distributions, Solaris and Windows.
Executives at Microsoft and Xandros told vnunet.com in an interview that BridgeWays drove the partnership.
"For us to be able to have tightly coupled technologies inside our products [with Microsoft products] you cannot achieve without actually sitting down with Microsoft," said Andreas Typaldos, chief executive at Xandros.
The company will use the Web Services for Management standard as well as APIs where available.
But such standards do not cover all the technology required to provide granular control needs, according to David Kaefer, Microsoft's general manager of intellectual property licensing.
"Interoperability is not just an API, or just a protocol or just a standard. It sometimes requires the sharing of documentation and source code, and sometimes proprietary and royalty free mechanisms," he said.
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