The watch, running a modified version of Windows 8, will be available in a number of colors (red, yellow, black, grey, white and blue), and will have its own built-in antenna, relieving it of the need to be synced with a smartphone, the sources said.
Rumored access to cloud storage would also eliminate the need for it to be connected to a smartphone.
The Redmond, Wash., company has reportedly been sourcing 1.5-inch displays for the project since April.
The information comes amid news reports Apple is aggressively hiring engineers to help create an iWatch.
Samsung, Sony and Dell are also reportedly working on wearable computers.
Neither the Microsoft nor the Apple devices are expected to appear until 2014.