Portugasl - just so you are clear, there is no iPod output that goes to a DAC. Both the headphone and the line out (USB/dock) provide an analog signal. As far as quality goes, my experience is like Jeffreybowmans - up the quality of the righ and you will hear it. I also agree with him that using the sync feature is the way to manage the content.
Let me leave you with another thought. Like a lot of people you are backing into hard drive based digital. My prediction is that this will replace your transport in the next 24 months. From that perspective spending your time ripping to anything less then lossless means that you will be going back to rerip your CD collection again - soon. Look at the big picture and manage what you carry around as opposed to limiting how you will manage your music in the future.
Let me leave you with another thought. Like a lot of people you are backing into hard drive based digital. My prediction is that this will replace your transport in the next 24 months. From that perspective spending your time ripping to anything less then lossless means that you will be going back to rerip your CD collection again - soon. Look at the big picture and manage what you carry around as opposed to limiting how you will manage your music in the future.