I use an arm strap for the iPod, but then, I have a Nano. It's small, so it's not a big deal. As far as headphones, I've tried many different styles, but none compare to the bargain bin headphones for running/exercising.
These are what I use:
http://www.consumer.philips.com/c/he...390_97/prd/in/
Plenty of bass and good range, but it doesn't block out ambient noise that you need to be alert to, like bikes passing you, or god forbid, car horns. You can also hear the cars coming.