The tech giant has been working on a smartwatch for the past year with help from teams who developed accessories for the Xbox, a source tells The Verge.
Microsoft could already be testing its own brand of smartwatch.
In development for the past year, the device is in the prototype stage, "a reliable source familiar with Microsoft's Xbox plans" revealed to The Verge. The watch reportedly comes with removable bands that attach to its 1.5-inch touch display.
One of the prototypes borrows the magnetic power connector used by Microsoft's Surface tablets. The five-pin connector can send both power and data to the watch. However, The Verge's sources say the final design of the smartphone may jettison such a connector.
The device is reportedly being created by people who were involved in the development of accessories for the Xbox and the console's Kinect sensor.
This latest scuttlebut follows a Wall Street Journal report published earlier this week that claimed Microsoft has already asked Asian suppliers to ship components for the potential smartwatch. One executive told the Journal that he had met with Microsoft's research and development team but that it's not yet clear whether the software giant will commit to producing the device.
A Microsoft smartwatch would compete against a potentially growing array of similar devices.
The Pebble smartwatch and the Martian Passport Watch are already ticking away.
Apple may be eyeing an iWatch, according to recent rumors. A patent application published in February hinted at an Apple-designed smartwatch.
Samsung recently revealed that it's been working on its own smartwatch. Even Google may be getting in on the act with a smartwatch reportedly being developed by its Android unit. A Google patent application published last October described a "smartwatch including flip up display."