Novell, maker of Suse Linux, will pay Microsoft a fixed percentage royalty on all its open source related revenue until at least 2012. In exchange, Microsoft will resell Suse, and promise not to sue Novell’s Linux customers.

The two companies will also jointly develop software to help Linux and Windows work together more easily in enterprises. This will primarily mean work on server virtualization – enabling Windows apps to run virtualized on Linux, and vice versa.

In perhaps the biggest surprise of the announcement, Microsoft said it will buy 70,000 coupons from Novell each year of the deal, each coupon good for a full year of Suse support from Novell.

Microsoft will give these coupons only to joint customers who are interested in deploying virtualized Windows on SUSE Linux Enterprise Server, or virtualized SUSE Linux Enterprise Server on Windows.

The company will also recommend Suse to its big customers that are determined to deploy Linux, although it will obviously continue to pitch Windows first and foremost.

We definitely want those customers who are combining Windows and Linux to choose the Novell Suse product line, Microsoft chief executive Steve Ballmer said. And we’re going to put our marketing behind that.

However, he added: If anybody is confused by the end of the press conference, I’ll say it now. If you’ve got a new application that you want to instance, I’m going to tell you the right answer is Windows, Windows, Windows.

Still, acknowledging the validity of Linux as an operating system choice, in more than word alone, is a pretty significant departure for Microsoft, which once put about the notion that Linux and open source licensing generally was comparable to a cancer.

As a form of chemotherapy, perhaps, the companies’ legal departments have come up with some agreements that Microsoft general counsel Brad Smith described as a bridge, an intellectual property or patent bridge, between open source and proprietary source software.

Basically, the two companies have promised not to assert their intellectual property rights against the other’s customers. Microsoft promises not to sue Novell customers for patent infringement, and vice versa. Despite selling open source, Novell also has a substantial patent portfolio.

Throwing a bone to the Linux developer community that Novell clearly does not want to alienate, Microsoft has also promised not to sue individual, non-commercial open source developers, regardless of whether they are connected to Novell.

Novell has secured an irrevocable promise from Microsoft to allow individual and non-commercial contributors the freedom to continue open source development, free from any concern of Microsoft patent lawsuits, Novell said in an open letter to the community. That’s right, Microsoft wants you to keep hacking.

The deal is a second recent kick in the teeth for Red Hat Inc, the biggest Linux vendor. The company’s stock is still reeling from Oracle Corp’s decision to target its customers and undercut its prices last week, and having a primary competitor get into bed with Redmond is the last thing it needed.

Ballmer, asked whether companies such as Red Hat would have a place at the table under the company’s new Linux strategy, dodged the question, indicating that Microsoft had talked to Red Hat in the past while not directly addressing whether it would deal with Red Hat in future.

On the technical side of the Novell-Microsoft deal, the two companies have decided to set up a facility where engineers will work on making Windows and Linux play more nicely together.

As well as virtualization, the deal calls for collaboration on web services management, federation between Active Directory and Novell eDirectory, and on translators for Microsoft Office’s Open XML and the open OpenDocument Format.