The line of chips, code-named Penryn, uses a new manufacturing method that allows Intel (INTC) to make the chips both smaller and more efficient. Penryn chips should help companies like Hewlett-Packard (HPQ), Dell (DELL) and Apple (AAPL) to design more energy-efficient servers, more powerful of desktops and more portable laptops.

In the near term, Penryn’s value to Intel could be more about reputation than the bottom line. Earlier in the decade, competitor AMD (AMD) took advantage of the chip giant’s missteps and offered products that many in the industry judged to be technologically superior to Intel’s. But now Intel is back with a vengeance, and has AMD on the ropes. And because the Penryn chips are based on an advanced 45-nanometer manufacturing process, they give the company valuable bragging rights.

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Intel’s stock performance in 2007. Chart: Jon Fortt

The special ingredient in Intel’s new 45-nanometer Penryn is hafnium, an element that allows it to shrink the size of its chips while improving their efficiency.

“Historically, silicon dioxide has been the main insulator and the base of these transistors,” said Intel spokesman Bill Calder. “In 2003 we identified a new structure that was different, but we didn’t say exactly what it was. So in January we announced that we had found a new material to replace silicon dioxide.”

Despite the advantages from the new manufacturing process, Intel isn’t likely to realize the full advantage from Penryn until the second half of 2008, when its chip-producing factories in Arizona, New Mexico and Israel will be able to churn them out at full tilt. At that point, Intel should be able to supply them to computer makers in the largest volumes at mass-market prices while, presumably, raking in major profits.

So far, Calder said, Penryn manufacturing at Intel’s Oregon and Arizona facilities is going well.

“Yields are good, we are in volume manufacturing now, and we are ramping pretty much in accordance with all the previous processes,” Calder said. “Moore’s Law lives.”

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That still leaves AMD a window to answer Intel’s challenge. In September, AMD announced a new chip for servers, code-named Barcelona, that sports an advanced design with four processing cores. AMD has also promised to offer a desktop version of the chip before the end of the year.

While AMD is touting Barcelona’s design advantages, it’s not a sure thing that it will translate into market success. Early versions of the Barcelona chip are slower than AMD had hoped, and it’s not clear whether the company has been delivering large volumes of the chips to customers.

AMD’s best chance of competing with Intel might lie in the graphics technology it acquired when it purchased graphics chipmaker ATI. AMD has said that the multimedia processing technology in graphics chips is now so important that it will become a core part of the way mainstream computer systems are designed.

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