I think some of Joel's problems can be resolved by hijacking the firmware, tbh. I have had good results, even never having used lossless.
A few points:
1) Hard-disk based provision of music is inherently preferable to spinning-disc based media, given a bit-perfect copy of the source (google EAC, or other threads here).
2) The DAC in an iPod is a Wolfson one, and therefore on a par with that used in many good CD players. However, the headphone socket of an iPod is pretty crummy so a dock is obligatory, IMO.
3) You should uncripple the volume restriction of later European iPods (google ipod volume unlock).
4) Wadia and Krell both have spectacular iPod docks out there, the Wadia ($350) being most interesting as it bypasses the iPod's dock and does the D/A conversion itself. Now that to me is very appealing - bit-perfect copies on your iPod direct into an audiophile-grade DAC? Hoo cha..........