The Wall Street Journal's sources told the paper that several prototypes have been built for the simple streaming device, which would allow access to the Xbox Live suite of entertainment applications.
The most recent iteration allowed Kinect-enabled gesture control, according to the report, and would utilise the same user interface as the new Xbox console, which will be unveiled on May 21.
The set-top box, which speculation has suggested would not be a core gaming device, could allow Microsoft to attract more Xbox Live sign-ups while challenging the Apple TV and Roku set-top boxes.
New Xbox first?
However, the Wall Street Journal's sources claimed Microsoft is still in two minds about whether to unleash the Xbox-branded set-top box
There is concern, one person familiar with the plans claimed, that the launch of a cheaper device packed with all of the same video and audio applications would lessen the demand for the new Xbox itself.
Microsoft will already face huge competition from Sony's PS4 when both devices launch, in all likelihood later this year, while the games console market isn't what it was during the PS3 and Xbox 360 heyday.
If Microsoft does indeed launch this entertainment-only Xbox, it would be somewhat of a shock if it were unveiled on May 21 alongside the new console.