After the launch of the Surface tablet, Microsoft (MSFT) is reportedly is busy testing a smartphone with Asian suppliers.
However, it is not clear if the device will enter into mass production. The phone comes with a screen size between four and five inches, The Verge has reported.
Though previous reports suggested that Microsoft was mulling its own flagship Windows Phone, the device is unlikely to be unveiled before 2013.
With Microsoft promoting its hardware partners HTC and Nokia, Surface phone is tipped to be a "Plan B" if Windows Phone 8 with traditional hardware partners fails to gain traction.
If Microsoft pushes ahead with the mobile phone, it emphasizes how Microsoft has moved away from long-standing practice of making software and leaving decisions about design, features and marketing of computing hardware to partners such as Hewlett-Packard or Samsung Electronics, the Wall Street Journal has pointed out.
Research firm IDC has predicted that the market for smartphones is rapidly expanding with strong demand from China and other emerging markets. IDC has pegged global smartphone shipments to grow 38.8 percent in 2012 to 686 million units.
The news of Microsoft working on its own smartphone was reported previously in several technology blogs.