ipod connection to home audio system

Should be no problem as you describe it. For completeness sake, I know of one cheaper alternative to Wadia that taps the digital signal from the iPod/iPhone and also features a USB input: Onkyo ND-S1. Unfortunately, for some reason the product is not at all mentioned on Onkyo's US site. Still, for information here's a link to the European site (includes specifications and manual). This digital dock costs between EUR 130 - 150 over here.
http://www.eu.onkyo.com/products/ND-S1.html

Not sure if you're just looking to make music or if you're looking for best sound.
If you just want to make music, all you need is a cheap Radio Shack cable with 1/8 inch (I believe, whatever size fits in iPod) headphone on one end and double RCAs on the other. RCAs plug into any input (except phono) of your receiver or preamp. Headphone jack can go into the headphone out of the iPod or the audio out of the dock if you have one.
For best sound, listen to the other guys who posted before me.

I bought a Wadia and love it connected to a PSA DL III which sounds better than I ever expected. Of course compression rate matters and I am only using standard ACC format and listen even more often now. When I do critical listening I prefer vinyl that takes set up time.

For about $100, take a look at the Audioengine W2 wireless device. Google it, and search the archives here for more info. This thing works surprisingly well.

thumbs up for the wadia 170i. with a good dac and digital cable, it really surprised me.