Better sound quality than the I-pod?

What's wrong with the sound of the ipod? People like to bash who ever is at the top of the mountain. The headphones that you buy (don't go with ths stock Apple ones) will have more to do with the sound than any differences in the players.
You might want to take another look at using uncompressed files. Because they are so large, your hard drive will be constantly spinning to fill the buffer..in the end your battery life will suffer dramatically. I use Apple Lossless with my ipod and at home to feed a usb dac. They sound fine and are bit for bit the same as AIFF files.
Do some reading before you buy..

You need to go out and listen for yourself I guess. I'm pretty anal and I would never call the Ipod shrill. I have noticed that the bass is stronger using line out and an outboard amp versus the internal amp. I would never call it deficient though.
And while an optical out would be fun to play with, I don't think it can measure up (literally and figuratively) to a usb output from a computer.
Steve