Looks like Microsoft is keeping good on its word that the company is transforming into a "devices and services" company. Microsoft is working on an Xbox Surface tablet, according to The Verge.

As the name implies, the device would feature a 7-inch display and focus largely on gaming, The Verge reported, citing unnamed sources.

The Xbox Surface would follow its larger brother, the recently launched Surface RT, which features a 10-inch display and runs a stripped-down version of Windows called Windows RT. The Xbox Surface would reportedly run on its own version of Windows as well.

Microsoft has of course declined to comment. "We don't comment on rumors or speculation," said a company representative who spoke to The Verge.

An Xbox Surface would follow up to perhaps the hottest brand Microsoft owns. The Xbox 360, with the added innovation of its Kinect motion-sensing device, remains a powerhouse in the video game industry and continues to be a draw for consumers. The 7-inch tablet would also be consistent with CEO Steve Ballmer's letter to investors earlier in 2012 than company was in the midst of a transformation into a company that does hardware just as much and as well as software. A concept perfectly illustrated by the Surface tablet.

"This is a significant shift, both in what we do and how we see ourselves - as a devices and services company," wrote Ballmer in the letter.

"It impacts how we run the company, how we develop new experiences, and how we take products to market for both consumers and businesses. The work we have accomplished in the past year and the roadmap in front of us brings this to life," Ballmer said.

We first began hearing whispers of a Surface gaming tablet from Microsoft back in June.

ZDNet reported in October about the possibility of an Xbox Surface, saying it could be Microsoft's first entry into the 7-inch mini-tablet segment.

"A tablet could take advantage of the move by consumers to mobile games played on smartphones and tablets, which have steadily taken market share away from the traditional video game consoles," said CNET.

The Xbox Surface gaming tablet would likely include a custom ARM processor -- the same kind used in other tablets and smartphones -- and more RAM to handle more intense games, The Verge reported. Specifications could be changed to include an Intel system-on-a-chip processor instead, the website noted.

According to The Verge, Microsoft is developing at least part of the Xbox Surface in the company's offices in Silicon Valley, adding that the offices have recently been locked down, most likely for increased security as the company begins intensely testing the tablet.

If the report is to be believed this is only going to rankle Microsoft's partners even more.

In a recent interview with Tencent Technology, Acer executive Lin Xianlang unleashed a cautionary barb for partner Microsoft after the company recently released its first ever tablet device, the Surface, Oct. 26. Xianlang suggested the company stick to what it knows best - software - and leave hardware manufacturing to companies who are better suited to handle it. Xianlang compared hardware manufacturing to "hard rice," speculating that Microsoft might find it extremely difficult to eat, according to a translation from CNET.

Of course, the hardware in question here is the Microsoft Surface tablet, a direct rival to Acer-made Windows 8 tablets like the Iconia.

Acer has plenty of reasons to worry about the future success of Microsoft's Surface. The company has posted steep declines in recent quarters, with its global shipments falling 10 percent year over year in the third quarter, according to research firm Gartner, and its shipments in the U.S. have fallen 28 percent over the same period.

As Engadget points out, though, "Microsoft's tablet has been boiled and salted just right, which might be the real reason Acer is so averse to it."

Microsoft Surface tablet features

The RT sports a 1366x768 HD screen, while the PRO has a 10.6-inch Clear type Full HD (1920 x 1080) screen with 16:9 widescreen.

That means they are among the biggest tablets in the market. If you are not satisfied with the typical 10.1-inch tablet, you can go for the Surface tablet. Along with the touch keyboards with the device, you can turn the machine to a small notebook.

The Surface tablet comes with five Touch Covers. Different from typical keyboards, the Surface keypads provide a smoother typing experience thanks to their touch-based surface.

The Surface tablets mount both front and rear cameras. The front camera, named life cam by Microsoft, makes the tablet ideal for video chatting through Skype or other services. Using the rear camera, you can capture images and video clips.

Microsoft puts forward better memory options with the Surface tablets. The device comes in 32GB, 64GB and 128GB options. The 128GB is available only with Surface Pro. Further, you can expand the memory using external memory sticks thanks to microSD card slot. That is, you can store enough data including music, software items and video in external clips.

The 3mm Touch Cover can be connected to your Surface tablet with a single magnetic click, so, now you can type text and send messages quite easily.

The Surface's tablet housing features a revolutionary kickstand. Along with fully functioning keyboard and track-pad, the integrated kickstand helps you place the gadget in both portrait or landscape modes.

According to Bloomberg, Surface will only be able to go online using a short-range Wi-Fi connection. This is a stark contrast to Apple's iPad 3, which has a 3G option, and a faster LTE connection.