After releasing the Xbox, Microsoft is already working on a new piece of gaming hardware. Code named Freon, reflecting the notion that it is the coolest secret project at Microsoft, at least in the eyes of the Xbox video-game division, Wall Street Journal reported.

What Freon stands for is a souped-up successor to the Xbox console -- capable of playing games but also offering television capabilities, such as pausing live TV and recording shows onto a computer hard drive, say people familiar with the effort. Though it is unclear whether such a product will ever be built, its core concept appears to have the backing of Microsoft Chairman Bill Gates, who wrote in an internal memorandum in January that he was a "big fan" of a machine that would combine video services with gaming.

Such a device, which could cost around $500, would have another big advantage: It could beat video-game market leader Sony to the punch. Microsoft officials are mulling releasing some kind of new game machine sometime next year or in 2004.