WSJ.com - In Our Post-PC Era, Apple's Device Model Beats the PC Way: "Microsoft is hedging its bets. It has, in effect, created a little Apple inside Microsoft with the Xbox group. The Xbox team shunned Windows and wrote its own operating system and user interface, and built its own hardware. (The new Xbox was even developed using Macintosh computers.)
Some Microsoft officials dismiss this anomaly by claiming that the game-console business is a special case. But now, Microsoft has assigned the Xbox team to create a portable music player it hopes can knock off the iPod. Why? Because the company is frustrated that the component model, which separates hardware and software, has failed in the music market. It's looking for more integration.
Still, the end-to-end model isn't a lock. If Apple can't keep churning out cool products at reasonable prices, it could crash and burn. Unlike Microsoft, it doesn't have much help from other companies to succeed. But the iPod experience has shown that the PC model may not be best for all digital devices."
I'm pretty sure the Xbox team is using an OS based on Windows XP; that was definitely the case for the original Xbox, in any case.
Check Walt Mossberg's Personal Technology page for a no-subscription-required version of the article (the latest column wasn't yet posted when I created this post, however).