The media aspect of the Xbox 360 isn't one to be ignored, but remember that in the Microsoft home, the PC is still at the center.
If you have any Windows XP machines on the same
network to which the 360 is connected, the machine will search automatically for any and all shared music, pictures and videos and make them accessible from the media panel of the Xbox 360 dashboard.
If you have a
Media Center Edition PC, the Xbox 360 will also act as a
Media Center Extender, streaming any SD or HD content from your MCE machine.
You can also connect a digital camera or portable media player and access the device's content on your Xbox 360. Microsoft did confirm that both the iPod and the PSP would be supported, albeit with some obvious limitations. Songs that you've downloaded from iTunes (with their DRM entact) will not be playable through the Xbox 360 dashboard, but any other MP3 files that you've stored on your iPod will work just fine.
What happens when you plug in a MP3 player? You get a list of what's on it of course: