On an earnings call, Microsoft's CFO Peter Klien has confirmed that Microsoft is working with partners on smaller versions of Windows 8 devices. While he doesn't state exactly what they will be, we would assume they'll be 7/8-inch tablets due to the current market. Klein also said that these will become available "in the coming months" but did not say if Microsoft itself would work on smaller Surface tablets, but we wouldn't put it past them considering Apple's iPad Mini and Google's Nexus 7 tablet.
The concept of smaller Windows 8 tablets doesn't come as a shock at all, as recently Microsoft lowered the minimum resolution requirements for Windows 8, sparking rumours of smaller tablets. A Wall Street Journal article also claimed that a 7-inch Microsoft Surface tablet was in the works.