C-Net was lucky enough to get a peek at the Xbox 360’s upcoming external HD-DVD drive yesterday and so far (though details are scant) the setup sounds pretty good. According to Kevin Collins, senior programmer at Microsoft, all of the video and audio processing is done in the Xbox 360 itself, meaning that the external drive’s cost should remain pretty low. Unfortunately, we won’t be getting our hands on an official price just yet: “Collins said Microsoft’s HD DVD drive will be among the least expensive of the HD DVD players.” That doesn’t say a lot, given how both Toshiba’s HD-A1 and RCA’s HSDV5000 retail for around $500.

Given how critical Microsoft has been of the Playstation 3’s price, it seems like a given that their HD-DVD drive will retail for much less than $500. But will it fall below $200, making the Xbox 360 + external HD-DVD cheaper than the PS3? Looks like for now we’ll have to keep playing the waiting game.