As expected long ago, ATI Technologies today announced it has entered into a technology development agreement with Microsoft. Under the agreement, ATI is developing “custom, leading-edge graphics technologies for use in future XBOX products and services.

Financial terms of the deal were not disclosed, but we expect some of them to emerge pretty soon. Currently revenues from XBOX account for roughly 20% of NVIDIA Corporation’s revenue. The company said in its statements that core-logic for the console is a product with rather high margins.

Microsoft said that it selected ATI Technologies after reviewing the top graphics technologies in development and determining that ATI’s technical vision fits perfectly with the future direction of the XBOX.

XBOX appeared to be a pretty successful game console, though, analysts think that the XBOX 2 or XBOX next will be a hugely more successful product for Microsoft and will probably make a more significant impact on the game industry.

ATI currently supplies graphics processors for Nintendo GAMECUBE console, but there is no information about ATI Technologies’ participation in the next Nintendo console project.

ATI Technologies’ stock rallied after the announcement to $13.06 at press time from Thursday’s Nasdaq close of $12.25. Shares of NVIDIA Corporation started to slide after the PR issue. At press time NVIDIA’s stock is at $16.25, down -3.16% from yesterday’s Nasdaq close.