Source - IGN
IGN have revisited the Xbox handheld topic with some more hearsay and rumour courtesy of Microsoft's own Paul Goss, a senior VP in their mobility section. It was exactly a year ago that the company first mooted the possibility of a handheld, even before the subject of the Xbox was first brought up. I think over time, as we establish Xbox as a successful gaming device, the concept of a companion gaming device is a very interesting thing. We could potentially leverage a lot of what we've done in the richness of a Pocket PC, with an integrated radio, and a form factor dedicated to gaming." Goss then goes on to talk about the possibilities of connecting the unit directly to the Xbox, much like the successful N64 / GameBoy Color linkup options available in some recent games.
The quotes come from an article in the San Jose Mercury Times.