The project is being worked on by Microsoft employees who were formerly members of the company's Xbox and Kinect teams, according to The Verge. The device is said to be in the prototype phase, with a 1.5-inch touch display attached to removable bands, as was reported earlier this week.
Rumors of smart watches and other wearable technology have been heating up in recent weeks, as industry insiders claim such devices will be the next big thing in tech. Apple is also said to have a 100-person team working on its own smart watch, a rumored product frequently referred to as a so-called "iWatch."
Any potential wearable devices from Apple, Microsoft or others would compete with Google Glass, a smart headset accessory in development by the search company. Unlike rumored products from other companies, Google has been very public in its development of Glass, and recently began providing the first test units to developers and others.
One report from earlier this month alleged that Microsoft is also working on a headset accessory similar to Google Glass. It's been suggested that Microsoft's wearable technology push could be unveiled to the public as soon as early 2014.
Also potentially in the mix is Samsung, which is reportedly working on its own smart watch accessory. Samsung has already tried and failed to grow the niche market with two products released over the years, neither of which made much of an impact.
Still more reports have claimed that Google is working on its own smart watch in addition to Glass, while LG is said to be developing its own wrist-worn accessory. Interest in smart watches picked up last year when a Kickstarter campaign for the Pebble watch earned more than $10 million. That product began shipping to the first backers this year.