I wondered about this myself. We have a preschool teacher at our school who purchased iPods for her classroom. She downloads audiobooks on hers for a listening center. Her preschoolers are able to find the story they want by looking for the book cover on the iPod. I was very impressed.
It will depend on the model of ipod. In general you can download lectures, special recordings, etc. With a model that handles video you can also create videos for download. If the students have ipods, using a constructivist approach, then one would expect them to create content based on your curriculum and share their creations with other students.
The iPod Touch is very interesting. It has most of the iPhone features without the cell phone. You now have a wifi enabled, portable computer. This allows you to begin thinking about Ubiquitous or 1:1 computing in the classroom. You could use all of the wonderful Web 2.0 resources, and deliver content as well as take polls, etc. I would be interested in where you decide to go with ipods and the grant.
I've used iPods in my class, though I had to call them "focusing devices" to sidestep the NYC DoE's ban on them. Mostly, I let students use them in my classroom when they were researching and writing. For writing, especially, it seemed to be just what some students needed to remain focused. That having been said, a colleague did complain that I was making enforcing the iPod ban difficult, and I was asked to stop. Nevertheless, I think that using iPods for basic focus can go a long way.
I've also used iPods as ways to have students share and critique work. So, rather than just write an essay and peer review it--a practice which is often a bit too quick to be wishy washy--students can record their writing and share it digitally with others. Then, peers can write short, terse critiques and record them. This also works well when experimenting with musical responses to literature. I wrote about work my students did with recording raps in response to Chaucer in an English Journal article not too long ago. You can find it at: http://www.ncte.org/journals/ej/issues/v96-6
Hope it helps. So glad the conversation is being had!
You can get around that ban if the students are in special ed. If you wirtie it into the IEP that they can use their IPOD if avaliable. After all, it is assistive technology. You might also want to draw up some kind of contract with rules. CYA