Source: Australian tech-news site Smarthouse.

　　What we heard: In September 2005, Microsoft announced it was countering rival Sony's drive to make Blu-ray disc the successor to DVD by backing the HD-DVD format. Ever since then, speculation has percolated about whether Microsoft's gaming console would come with an HD-DVD answer to the PlayStation 3's internal Blu-ray drive.

　　Though such rumors were largely dispelled by the January 2006 announcement that no internal HD-DVD was in the works and recent discounting of the 360's external HD-DVD player, this week they heated up again. The spark was an article on the Australian gaming site Smarthouse citing "insiders" at Japanese electronic giant Toshiba. Though Toshiba partnered with Sony to manufacture the PS3's Cell processor--and recently bought out Sony's share of Cell manufacturing--the two companies are backing different horses in the HD-DVD/Blu-ray war.

　　Though Blu-ray had been gaining an upper hand in the conflict, Toshiba went all out this fall to even the odds. The company paid a reported $150 million to Paramount to make its high-definition video releases HD-DVD-only to counter Sony Pictures and Sony Pictures Classics' ample Blu-ray exclusives. It also countered the five free Blu-ray disc offer with a quintet of free HD-DVDs after the purchase of any HD-DVD player, including the $179 360 add-on.

　　Now, if Smarthouse is to be believed, Toshiba is making another move to increase the adoption of HD-DVD. "Insiders at Toshiba, owner of the HD-DVD patents, claim that Microsoft is working on a brand new Xbox that will incorporate not only a new HD-DVD drive but a larger hard drive and new entertainment software that is a spin-off from its struggling media center offering," the site claims.

　　After quoting a Toshiba executive saying "an Xbox with a built in HD-DVD drive is critical," Smarthouse goes on to say the new 360 will also have built-in Wi-Fi and true 1080p output--capabilities both versions of the PS3 already have. Microsoft is also considering building in a dual HDTV tuner, Tivo-esque program guide, and a new type of universal MP3 player docking port.

　　Though such a move will likely irritate 360 owners who've already cluttered their A/V setups with the external player, an Xbox equipped with an internal HD-DVD drive would be a logical next step. With high-definition video becoming standard and TVs growing ever larger, more and more consumers will be looking for a game console that plays HD video out of the box.

　　But while such a move seems all but inevitable, one major issue remains: price. Right now, the cost of a $349 20GB Xbox 360 Pro or the $449 120GB Xbox 360 Elite and the external HD-DVD drive is far more than either the $399 40GB PS3 or the $499 80GB PS3--$528 and $628, respectively. If Toshiba and Microsoft can't make a HD-DVD-equipped console cheap enough to be attractive--or cool enough not to suffer from the console's widespread overheating problem--the next-gen console war could get a lot more interesting.

　　The official story: "Microsoft does not comment on rumors or speculation."--Microsoft rep.

　　Bogus or not bogus?: Not bogus that, provided the HD-DVD/Blu-ray wars continue, an HD-DVD-equipped 360 will be released. (The HD-DVDlite?) As for how much it will cost...that's another story.