NEC and Panasonic will assemble and market new products independently under their own brands based on ideas produced by the new firm.
"We aim to promote our uniqueness by coming up with different designs and different ways to operate the handsets," said NEC President Kaoru Yano.
The firm will use a Linux platform but will also develop other software for handling tasks including image and voice processing, as well as components for both NEC and Panasonic, the officials said.
NEC's cell phone sales operation lost 25 billion yen in the business year ended in March, due in part to weak overseas shipments. The company is projecting another loss of 15 billion yen for fiscal 2006.
Matsushita posted a sales loss of 8.4 billion yen in the same period.
Both firms aim to scale back their money-losing overseas (outside Japan) operations and focus on higher-end handsets.
The two companies have already combined on developing cell phone software and are discussing ways to build on that collaboration.