Although it isn't an iPod killer, Arduino forum member Tom Carpenter has build an MP3 player which really pushes the boundary of the Arduino ecosystem and still results with a reasonable product. Based around an Arduino Mega2560 board, the player uses a trackball for user input, a colour LCD shield for display, and has a good graphical user-interface. The software can also recognise album art covers, song title and album names, and so on. After making a prototype with seperate bords, Tom's second iteration is much smaller:
For more information, design files and discussion - log in to the Arduino forum. And for more news and updates, please follow us on twitter, Facebook and Google+ - and don't forget to check out Ninja Blocks!
If this sort of project interests you, and you are wanting to create more complex Arduino-based prototypes, consider reading "Arduino Cookbook" by Michael Margolis:
For the user who has moved from the beginner stage, the recipes in this book provide solutions for most common problems and questions Arduino users have, including everything from programming fundamentals to working with sensors, motors, lights, and sound, or communicating over wired and wireless networks. You'll find the examples and advice you need to begin, expand, and enhance your projects right away. For more information and to order, click here.