When I started riding to work, I did listen to music for a while, then started riding with just one in the ear - found it confusing to listen to traffic/warnings in one ear and listening to music in the other. After riding on the MS Bike ride that states you are not to listen to an IPod while riding, I quit doing it and haven't looked back sense.
Can you hear a car coming up - perhaps not on some cars, some you can. When I ride the bike trails, I HATE PEOPLE listening to their IPods - do they hear me when I announce "On your left"? Sometimes yes, sometimes I don't know - still announce myself, but sometimes it's tempting to just blow by them - but that would be rude and I don't want to get Peds/Joggers ticked off anymore on bicycles.
What I don't understand is WHY does everyone have to be entertained ALL the time? Everyone has an IPod going with whatever they are doing. People texting/talking to their friend while walking/driving. Kids watching DVD's while Mommy is going to the store. TV's everywhere while eating/shopping. Society has gotten to the point that we are expecting to be entertained every waking second.