GOOGLE says:
To listen to unprotected AAC files from an iPod music player, follow these steps:
1. In the Xbox Live section of the Xbox Dashboard, select Xbox Live Marketplace, and then select Game Downloads.
2. Select All Games, and then select Alphabetical List of Games.
3. Select Optional iPod Support from Xbox Live Marketplace, select Optional iPod Support again from the Xbox Guide, and then select Confirm Download.
4. After the download is completed, select Done, and then press the BACK button or the B button three times to return to the Xbox Dashboard.
5. You can now listen to unprotected AAC audio files by themselves or in playlists with MP3 and WMA audio files from the following devices:
An iPod
A portable audio player
The Xbox 360 Hard Drive
A USB flash-memory device
also I don't think it alows you to play videos from an ipod, don't know about other players (haven't tried)