Updated since 11:44 am EST with stock prices.
The Redmond, Wash., software giant is working with computer hardware manufacturer Asustek to build its own phone.
The planned device is a so-called candy bar touchscreen design running on Microsoft's newly introduced Windows Phone 7 operating system, says Northeast Securities analyst Ashok Kumar, who talked with Microsoft's suppliers and design partners.Unfortunately, Microsoft and Asus have encountered some setbacks on the road to manufacturing the next Apple iPhone killer or Google Android annihilator. Production of the phone has been stopped temporarily. "The phone is still alive," says Kumar, but its arrival to the market will now probably be put off until early next year. The news comes just four days after Microsoft announced -- at the Mobile World Congress in Barcelona -- that its Windows Phone 7 operating system will be available on the some phones by Christmas. Kumar says he hasn't heard what caused the Microsoft phone delay, but he speculates that if it's a software issue, it could apply to other hardware developers and spoil the Christmas timeframe promise. A Microsoft representative said the company does not comment on speculation. The news of Asus' involvement confirms some of the speculation around "project pink," an effort by Microsoft to develop its own phone. This would be a move similar to Microsoft's Xbox approach to video games and its Zune entry in media players. Asus is a Taiwanese computer maker, perhaps best known for its netbook pioneering effort with the Eee PC line of mini laptops. Asus is also the hardware partner that helped Garmin (GRMN) break into mobile phones with its nuviphone. Like Google and Apple before it, Microsoft obviously sees the fast-growing mobile phone market as a land-grab opportunity that's far too important to watch from a distance.