Company sources told the Nihon Keizai Shimbun that the game will run on an operating system based on Microsoft's Windows CE, so that it can be played on both a game machine and a personal computer.
The agreement, expected to be signed in October, envisions a package planned to sell for $250 or less, sources told the newspaper.
In building on the CE version of Microsoft's widely used operating system, Sega and Microsoft aim to simplify the task of developing games for both PCs and game machines, thereby allowing the companies to offer a variety of game software at lower costs.
According to the newspaper report, the game machine would use a 128-bit microcontroller now under development at Hitachi and would be at least ten times more powerful than Sega's existing 32-bit machine.
The new machine would also come equipped with a built-in modem allowing users to compete with players in other locations. Multiplayer gaming is currently all the rage in the gaming industry.