In a recent tweet from Phil Spencer from the Microsoft Xbox team, the rumors are laid to rest about Microsoft working on a handheld gaming console. This brings peace to my soul as this would be another product from Microsoft that would arrive way too late and offer nothing that hasn't been done already at a price that is just too high. The goal of the Windows and Microsoft team is to focus on Windows Phone, Tablets and maybe work with their own controller for Windows devices down the road.
There have been rumors for nearly two years that Microsoft has been working on a seven inch version of its Surface tablet that would be dedicated to gaming and even had the "Xbox" brand name. However, none of those reports have been confirmed by Microsoft. Spencer's new statement would seem to indicate that if Microsoft did have plans for an Xbox Surface tablet, they may have been put on indefinite hold.