The virtualization market got another shot in the arm one day after the blockbuster VMware IPO, with the $500 million dollar acquisition of virtualization vendor XenSource by Citrix.

The acquisition is expected to close in the fourth quarter of 2007 and includes a combination of cash and stock. XenSource only has 650 paying customers, but the idea with acquisition is that XenSource's products will get wider distribution through the Citrix sales channel.

"One of the dream channels for us is the Citrix channel," XenSource CEO Peter Levine said on a morning conference call. "All our partners carry it [Citrix] now and a lot wanted to create server virtualization practices.

"I'd expect that most of the Citrix channel is appropriate for the products we have; it's something we think will light up the availability of our products around the world."

XenSource builds commercial virtualization technologies that build off the Xen open source hypervisor project that is backed by IBM, Red Hat, Novell and others. Earlier this week XenSource launched its XenEnteprise version 4, which expands the platform with more features in a competitive play against VMware.

Though XenSource may only have 650 paying customers today, Levine was quick to note that the number of customers has been doubling quarter over quarter and the release of XenEnterprise v4 is expected to accelerate that growth.

Levine said that there are "tens of thousands" of users for the free XenExpress product. Those users have been waiting for the enterprise features in the latest XenEnterprise release, and Levine expects rapid customer growth acceleration as a result.

Citrix and XenSource officials on the morning conference call highlighted the huge potential for the XenSource products, specifically on Windows. XenSource has a working agreement with Microsoft that will ensure that Xen runs on top of Microsoft's upcoming Viridian virtualization hypervisor.

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"We're building on top of the Microsoft Viridian base," Levine explained. "Think of Viridian as the proxy for the Xen hypervisor. When Viridian comes out, the same set of products that we've done will be on top of Viridian. The major differentiator will be that we can offer customers a choice, whether they want platform virtualization, a stack based on Xen or a solution based on Viridian."

The XenSource product lineup is expected to be integrated into Citrix's offering providing a complete stack of solutions that enables desktop delivery.

Though XenSource is being acquired, Levine pointed out that the open source work will remain a separate initiative in some respects.

"Think of the open source Xen project as being run by the community," Levine said.

XenSource is involved as leader and active partner but there is a separation between what XenSource does with its commercial products and what goes on in the Xen open source community. It's a separation that Levine is intended to make even stronger.

"To continue to promote open source leadership we'll be working on an independent body to help manage and take over the Xen project."