Rolo on the ipods is still broken - as some of you have found out. But the basic idea is that you browse to a firmware file on your hard drive, play it like a music file, and rolo will load and run that firmware without rebooting.
The first step will be to make it load a different version of Rockbox to the currently running one (which is of limited use - they'll both share the same .rockbox folder) or to load an IPL (Linux) kernel. It would be nice if it could be used to start the Apple firmware, and I plan on trying to get that working, but it's not a high priority for me - the Apple firmware is much more fussy about the state of the hardware than Rockbox or IPL, and will be harder to get working.
However, you can't just rename files to ".ipod" and expect rolo to run them - "rockbox.ipod" has a small header at the start identifying the target player that firmware is for and it also contains a checksum. When loading either the IPL kernel or the Apple firmware works, I'll add support for .bin files to Rolo directly.