The next generation of the Zune music player is set to have a touch screen, web browser and radio receiver.
Microsoft said Zune HD, due out in the autumn, will also feature a high-definition video output that will allow users to play files on HD televisions through a docking station.
Its screen will use organic light-emitting diodes to help improve battery life and image quality.
Microsoft said the new Zune will be the first with a receiver for HD Radio, used by stations to transmit extra channels alongside regular broadcasts.
The new features ramp up Microsoft's effort to compete with Apple products such as the iPod Touch, and a push to integrate different platforms.
Microsoft said the new Zune will also serve Xbox Live subscribers for the first time.
The company will demonstrate how the new Zune and Xbox link up "to create a game-changing entertainment experience" at the Electronic Entertainment Expo in Los Angeles next week.