In my setup, I am playing my iTunes via an Apple Airport express, which has a digital optical out. Yes, jitter is an issue, but it sounds pretty good. If I want it to sound great, I'll have to add a nice DAC. Still haven't decided what to buy, but I keep seeing some nice ones on Audiogon... You won't get decent sound from an iPod's DAC.
BTW, the folks over at the Apple circle clued me in that you need to make sure the iTunes volume is set at 100% to get true lossless playback over the Airport Express.