The recent rumor has been that Microsoft and Toshiba are working together to create an Xbox that includes an internal HD-DVD drive.  The rumor goes on to suggest that the new machine will be a wireless networking entertainment hub supporting 1080p playback and have a port for a MP3 player.  The new device could be ready in late '08 or possibly ready for CES '09. 

The problem with all of this is that CES '09 is when one might expect Microsoft to announce the next iteration of the Xbox brand.  I would be very surprised if the next Xbox did not include an HD-DVD drive and had Wifi capability.  I also expect that the device will be able to wireless synch up to a Zune as well.

The average life cycle for a gaming console has been 5 years while the life cycle of the PS1 and PS2 has been stretched to 6 to 7 years.  Since the Xbox 360 was launched in 2005 I would expect the next Xbox to be announced in '09 with a holiday 2010 release.  Microsoft's first Xbox only lived 4 yours before they killed it off to release the Xbox 360.  This cycle was too quick and has possibly lead to several hardware issues in the Xbox 360.  

Microsoft needs to let this generation of consoles  live a bit longer than the original Xbox.  I do not think we will see the next Playstation until 2012 because the PS3 should have long legs and will technically not be irrelevant for a long time.  The Wii will most likely only last 4 years until a HD version with a hard drive is released.  I really don't expect anyone to put out another game console until the HD media war is over because no one wants to support a dead technology.