The Windows 8 maker is developing a new range of Surface tablets to follow on from the Surface RT and Surface Pro including a smaller 7in model. These new devices will go into mass production later in the year, according to the Wall Street Journal. See also: Microsoft confirms plans for hardware beyond Surface.
Sourced familiar with Microsoft's plans said a 7in tablet wasn't on the cards last year but the firm has realised it needs to respond to the popularity of smaller tablets like Google's Nexus 7 and Apple's iPad mini.
According to research from IDC, half of the tablets shipped in the fourth quarter of last year were smaller than 8in.
The news comes as figures from both IDC and Gartner show that PC sales fell by more than 10 percent in the first quarter of 2013 compared with 2012.
Microsoft is also planning price breaks for its flagship Office software as well as updates over the next few months to its Windows 8 operating system. IDC has partly blamed confusion regarding Windows 8 for the decline in PC sales.
Windows 8 launched last October but the company has struggled to shift the operating system which is design for desktop machines as well as touchscreen computers. The huge design overhaul, including the removal of the start button, has alienated many Windows users.
Alongside 'Blue', a version of Microsoft software including Windows which is frequently updated, the firm is also rumoured to be working on a Surface smartphone. More details on these are expected this summer.