Citing sources close to the project, the report said that the new device, code-named 'Pink', would be a full multimedia phone based on Windows Mobile.
The project is being run within Microsoft by a team called the Premium Mobile Experiences Group, the paper claims. The group uses experience from Danger Inc, which Microsoft bought last year, which specialises in mobile devices.
Microsoft was unable to comment at the time of going to press, but has reportedly said that it remains focused on its mobile software business and is talking to a variety of manufacturers.
The deal would make sense for Verizon, which is looking for a product to compete with AT&T's sales contract with Apple for the iPhone. AT&T is currently trying to extend its exclusive deal with Apple for the handset.
Some parts of Atacama have not received rainfall for 500 years - but a sudden deluge of water upset the Desert's delicate biological balance
Spitzer Space Telescope could not spot Oumuamua, suggesting that it is actually pretty small
Greenland crater one of the 25 largest impact craters on Earth
This long-sought progenitor star was identified in an image captured by Hubble in 2007