I have an iPod and the only limitation seems to be file formats.
By that i mean it uses its own file format (AAV i think?) for holding tunes on the iPod but can read any MP3 format through the iTunes software. That means that any MP3 file you have, regardless of source, should be able to be interpreted by iTunes. I had a problem where i had a lot of albums in WMA format on CD that iTunes cannot recognise. For this i used a converter to convert them from WMA to MP3 so that iTunes recognised them and they could be added to my iPod.
I have not tested this with any of the legitimate download providers but have downloaded via www.kazaa.com and installed via iTunes to iPod with no problems.
It might be worth posting a message on the iPod message boards via the apple website - i have used that to get some answers on useage of my iPod and it's a good source of information.
Just one thing - if you do buy an iPod do not use the headphones - aside from looking naff (bright white??) it advertises to every spotty wannabe gangster teenage hood' that you have a sexy MP3 player in your pocket that they might want to help themselves to!!!
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