The rumor is that the 7-inch Xbox Surface will feature a custom-built ARM processor, and a high-bandwidth RAM specifically chosen for games.
However the Xbox Surface is allegedly being developed neutral to the hardware, and it could also be powered by an Intel chip.
Don’t expect this to run full Windows. Instead, you are likely to get a custom kernel. It is not perfectly clear whether this would be a general-purpose device like the iPad mini, but it seems that while it may support messaging and other features, the gaming focus will be noticeable all around.
Manufacturing is happening in facilities where Microsoft is already building other products, but under higher secrecy. Some of the development is allegedly happening at Microsoft’s US offices.
Finally, if the Xbox Surface does indeed make it to mass production, you should expect to see it right before the launch of a new Xbox console.
source: The Verge