As the war continues, Microsoft has stated that they will release an iPod rival. It's called Zune. Unfortunately, they didn't give any specification or information about their new product and how it will be integrated with their other services. This product is predicted to be released this year, but we understand if it will be postponed againn (as usuall, like Windows Vista that has been postponed for about half a year).
You can see a lot of comments about both products on the PCWorld's site