Here's the deal.
When you are using the iPod direct via the headphone output, you are using the digital stream from the iPod, going to the internal DAC (digital to analog converter) in the iPod going to the analog output stage of the iPod. If you are using the iPod Shuffle for this, you are entrusting a $49 device to perform all of the functions of your digital playback system.
Many folks serious about digital music will spend thousands of dollars on a CD transport (or music server) and thousands on a DAC (digital to analog converter and analog output stage). And it still isn't likely to please an analog fan who's willing to spend $15K on an analog rig!
BUT! There are alternatives. The new Wadia iTransport allows you to retreive the digital music stream from an iPod and send it to an external DAC for conversion and analog output. If the digital format on the iPod is a lossless format, it "should" be just about the same as using a quality CD transport or music server. So, you would only be limited by the quality of the DAC and cables you choose.
If you want to get decent sound directly from an iPod without the expense of external components, I think you might be limited to buying a modifed iPod from one of the modders like Red Wine Audio or Bolder Cable.
Lastly, you're also likely going to need to insure that you are ripping your digital music using a lossless format and not low resolution MP3. You'll never get great digital sound using a lossy file format.
Enjoy,
TIC
