If all you've ever done is listened to the headphone output of an iPod you're bound to conclude it sounds lousy (especially if you're listening with the stock earbuds, they're absolutely horrible). The way to go if you want quality is to use apple lossless files with the line out through the cradle. Better yet, mod the iPod to take all the crap out of the signal path after the dac and upgrade the capacitors to Black Gates (which Vinnie at Red Wine Audio does, and he did for me). This gets you everything that's causing such a buzz with PC based playback in something you can hold in your hand and take with you when you travel (although you will need a headphone amp because the regular jack is converted to a line out level).
Gary
Gary