I can't really help you taym, but I just want to add that I just got an old 30GB iPod to play with. Its running rockbox rather than the normal iPod/iTunes software and I'm also disappointed with the sound quality with my Panasonic earbuds and Grado headphones. It sounds like a weak amplifier really, with the quality decreasing significantly when the volume is turned up. Not sure how much difference new firmware could make.

I'm comparing this with an iRiver L Player which I had a short while ago - it sounded absolutely great in my opinion, but had other problems.