Microsoft has started designing a new-generation of Xbox 360's equipped with an internal HD-DVD drive and is currently selecting manufacturers in Taiwan to build the drive, according to sources in Taiwan's optical disc drive industry.

If the process of selecting partner makers and subsequent certification goes smoothly, Microsoft may launch the Xbox 360 equipped with the built-in HD-DVD drive in the first half of 2007 at the soonest, according to Digitimes.com.

It has to be said, of course, that Microsoft has yet to ship its Xbox 360-oriented external HD DVD player, and it may well have simply been looking for further manufacturing partners for the internal workings of this add-on.

Microsoft is expected to offer the external HD-DVD drive for its Xbox 360 at around the end of this year, in an attempt to compete with the Sony PlayStation 3, which will have a built-in Blu-ray Disc (BD) drive. The external HD-DVD drive will be capable of reproducing movies.