Bloomberg News states that Microsoft plans to release its iPod challenger - which will be capable of playing music and movies - by Christmas.
The device will also feature wireless internet connectivity, so users will be able to download music directly to the player without recourse to a computer, the report explains.
Microsoft has spent years relying on its hardware, software and service partners to dent Apple's market lead, but they have failed. With the iPod now commanding 77 per cent of the $4 billion US digital music player market, and iTunes commanding 72 per cent of music downloads, Microsoft has chosen to throw its own hat into the ring.
The project is being overseen by the leaders of Microsoft's Xbox team, the report states.
Interviewed in February, Microsoft CEO Steven Ballmer said his company was "committed to doing what it takes to succeed" in its battle with Apple.