Microsoft and Toshiba today announced that they are expanding their partnership to include a new line of consumer electronics devices. Under terms of the new agreement, the two companies will co-develop new HD-DVD players, devices that will play back the next generation of high-definition (HD) DVD content.

"The market for digital consumer products, including PCs, is huge and may develop in any number of ways," says Toshiba President Atsutoshi Nishida. "The alliance will definitely be beneficial for both Toshiba and Microsoft." In addition to HD-DVD, Microsoft and Toshiba will also collaborate on iHD, an interactive DVD format.

Toshiba's HD-DVD players will utilize Windows CE .NET technology from Microsoft and the HD-DVD technology that Toshiba helped develop. Both Microsoft and Toshiba are members of the DVD Forum, which is pushing HD-DVD as the next-generation DVD standard. A rival group, led by Samsung and Sony, is pushing an incompatible next-generation DVD format called Blu-Ray. Though it is a DVD Forum member, Microsoft may eventually agree to support Blu-Ray as well, because consumers will expect its operating systems to play all DVD formats.

Interestingly, HD-DVD could eventually find its way into Microsoft's eagerly awaited Xbox 360 as well. As part of the agreement, Microsoft said it would examine HD-DVD for inclusion in Xbox 360 or a future Xbox version. "The initial shipments of Xbox 360 will be based on today's DVD format," Microsoft chairman Bill Gates said. "We are looking at whether future versions of Xbox will incorporate an additional capability of an HD DVD player or something else."