iTunes version 4 introduced the ability to share your music library across your local network using Bonjour, Apple's zero-configuration networking technology. To set up sharing you simply access the Sharing preference pane, determine if you want to look for shared music yourself, and then configure what playlists (or your entire library) you want to share to the outside world. You can also set up a shared name for your library that will be shown to all viewers as well as whether or not a password is required to access your music. Just below all these settings is a message indicating how many users - if any - are connected to your library.
That's all well and good but I want to know what people are listening to. With a bit of clicking you can get this more specific information. First, you need to launch Apple's Activity Monitor (/Applications/Utilities), a program that lists all the running processes on your mac and various details about those processes. Next, find the iTunes process highlight it and click the Inspect button in the toolbar (or press command-i). In the process detail pop-up box that follows select the Open Ports tab and scroll to the bottom of the text window. Listed here is information on any user connected to your shared library and what they are currently listening to. Remember, just because someone is connected does not necessarily mean they are listening so keep this in mind.