I use my iPod Touch without any problems just plugs straight in… although you do need to buy the iPod Blue & Me Adapter. Check ebay for cheapest prices.
Blue&Me basically only plays mp3s. I don't know much about iPods but I know enough that itunes does not like mp3s! remember...Blue&Me developed by Microsoft not Apple options: a) buy a blue&me adapter ~£55 b) grab a 16gb usb stick for ~£15 and work with mp3s
I cant comment on how 'well' the ipod works with the system though...