I have an 80 GB iPod classic which sounds fantastic with lossless files and Etymotic ER4P earphones. IMHO, that combo is real hifi sound, just with a different "tone" than my main system, at an overall price that is very affordable.
The early complaints about the iPod Classic (aka 6th generation) were mainly due to software issues, which have largely been remedied by a series of firmware updates (which I waited for before buying one). Mine is fantastic - beautiful screen, better sound than my 4th generation model had, and an unbeatable interface (which I still prefer to that on the iPod Touch/iPhone due to the physical click-wheel).
It's a personal thing I guess, but I prefer the Classic to the Nano. The Nano is just too small for me, and I find it hard to use the click-wheel since it's so small. The Classic is still small and light, but at least feels comfortable in my hand. There's also the fact that 4 or 8 GB is quite limiting when going with lossless files since you only get about 3 CD's to a gig with Apple Lossless.