Microsoft has announced that the XBox 360 will support HD-DVD movies via an external accessory, to plug in via a USB cable.
If you haven't been following the HD-DVD / Blu-Ray wars, start with a normal DVD. A normal DVD gives you a video quality that is better than "normal" TV, but isn't as good as a High Definition TV can support. People who have HD TVs have been crying out for DVDs that actually support that higher level of quality. Two different formats have come out. One is HD-DVD that Microsoft and one "side" wants to use. The other is Blu-Ray which Sony and the other "side" is pushing for. Soon we will have the ancient VHS/Beta wars beginning again, with high definition DVDs available in both formats. The XBox 360 will support HD-DVD while the Sony PS3 will support Blu-Ray DVD.
What is interesting here is that the Sony PS3, when it comes out in winter 2006, will have the Blu-Ray DVD ability built in. You can buy the unit and instantly be able to play any Blu-Ray movie DVDs you own. With the XBox 360, it's an add on. I actually find this the better way to go. If you already own a HD-DVD player, why pay the extra $400 or whatever to buy "another one" built into your XBox 360? With the XBox 360, you just pay for what you need. If you want that HD-DVD player, you buy the accessory which will be cheaper than buying a standalone HD-DVD unit. If you do NOT want the HD-DVD player, then don't buy it! You're not forced to get it to get the console.
I want to comment that there is NOT a firm price or date announced yet for the XBox 360 add-on player. The $400 is just my guesstimate. I do know that the current Toshiba HD-DVD player on the market is $500 retail.