Our sister site TeamXbox is reporting that insider sources have confirmed that Microsoft is in the later stages of developing a "digital entertainment handheld." Referred to by the moniker "xYz", this device is supposed to be somewhere between a Zune and the Xbox, allowing the user to play games, play media, and do various Internet-related activities.

Sources related to the story described the handheld as "unlike anything on the market today," and described it as "a mashup of the Sony Mylo, the PSP, and the iPhone… err, the iPod Touch; [the MS handheld] doesn't need access to a phone network." The sources emphasized that it is not a Zune Phone, but a Live Anywhere device. The device is supposed to blur the lines between the Zune, Xbox Live and Sky Marketplaces, so it appears the biggest current setback for the release of the device is the Live Anywhere service.

This is just a mock-up we found on the Internet.
Live Anywhere has been talked about in the past but it has yet to surface. The service would allow you to buy media on your Xbox and play it on your handheld or vice-a-versa. The source indicates that gamertags and the New Xbox Experience that already exist will show how the handheld is "one step in a carefully planned strategy that involves several Live branding services."

The device appears to be held back mostly by software. When released, "[it] will be pretty evident that this device, its software, and services have been in the works for a very long time."