This Falcon project was reported by Mercurynews.com. Here's an extract of the article they've published yesterday.

The good thing about the smaller chips is that they will likely be easier to make in mass quantities and they shouldn't fail as often. Quality should automatically go up. That's what folks said about the 90-nanometer generation. But the 65-nanometer production process is a known quantity at this point at places such as IBM for sure and possibly at other suppliers such as Taiwan Semiconductor Manufacturing Co. So rather than fix the problems with the 90-nanometer machine, Microsoft has the easier problem now of getting a 65-nanometer machine to work right. I suspect that is why Robbie Bach, president of the Entertainment & Devices group, said on Thursday on a conference call with analysts that the company has "its hands around it at the engineering level."

Microsoft is in the process of qualifying the new Falcon chips and motherboard this summer.