Itanium was targeted at a very different market segment (although it may not have started life that way). The mid-range and high-end server market had been using 64-bit machines for ages: Sun Ultra SPARC, IBM P-series, DEC Alpha etc. Itanium was Intel/HP's attempt to play in this segment. Machines built around these processors usually had Multi-Chip Modules (in which each chip is sometimes multi-core e.g. IBM Power5), fancy interconnection networks (e.g. Alpha), huge caches (20-30MB is not uncommon on an Itanium system), loads of memory bandwidth, NUMA, etc. etc.
However, these servers were usually too expensive for small businesses. Therefore, Intel had always had a market for the Xeon line: relatively low-end 32-bit server parts. AMD was technically the first to step up the ante in this particular low-end server segment and introduce the Opteron as the first 64-bit x86 server processor. Intel's "reply" to this was the 64-bit Xeon, not the Itanium.
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I know the Itanium wasn't meant to compete with AMD's 64-bit solution. I was unaware that the Xeon was an attempt to "reply" to the Opteron though.