Microsoft have finally announced that yes they are developing a portable media device, called the Zune
http://www.comingzune.com/ is a great little idea to launch the product and build interest.
I know the Device has WiFi but im hoping it has bluetooth as well, as i am currently looking for a portable media device with bluetooth to connect to my new pioneer bluetooth head unit in my car... I can only hope i guess... Microsoft if you are reading this please take note!