Microsoft is teaming up with peripherals manufacturer SanDisk in an effort to develop smart USB devices that will allow users to carry their complete personal computing environment on a device as small as a thumb drive, Microsoft announced Friday.

Under the plan, Microsoft will develop software that will let users store their applications and data on small, Flash memory-based devices that connect to their computers' Universal Serial Bus. SanDisk will design and manufacture compatible hardware.

The first products from the collaboration will be available in mid-2008, Microsoft said.

The technologies will be designed to let mobile computer users carry a complete image of their desktops in their pockets, allowing them access not only to their data -- standard stuff for today's USB drives -- but also their applications and user interface setup while on the go.

The companies plan to add a security layer to the offering using SanDisk's TrustedFlash security and digital rights management technology.

The effort will elevate "simple flash storage to a whole new level of customer benefit," said Will Poole, corporate VP for Microsoft's Market Expansion Group. Microsoft also plans to seek out third party-hardware developers to support the initiative, the company said.

As part of the plan, SanDisk will phase out its U3 technology, which adds some smart features to USB devices. Independent software developers that have created U3-compatible applications will be offered help migrating their products to the new technology, which has yet to be named.

Microsoft said it plans to add support for the technology into its Windows XP and Windows Vista operating systems. SanDisk said its Cruzer USB flash drives will feature the technology when it becomes available next year.

Microsoft and SanDisk also said they would create a new entity to manage licensing and intellectual property issues arising from the venture.