My Sister wants an i-pod

I told her nooooooooooo!!!

But, i-pods are so darn convenient. And cute. From reading some of the posts here, it seems like there is a way to get better than decent sound from one (i.e. don't buy mp3's; transfer your CD's onto your i-pod using some form of lossless software, don't compress, purchase Ultimate Ears headphones...)

My question is: Can one get good (or, near great) sound from an i-pod? How? What does she need to purchase? [Ok, that was three questions.] Also, am I on the right track (with my sommary of posts read)? She has some favorite CD's, but (at 40 years old) she probably only has 50 or 75 CD's in toto... It seems a 20 or 40 Gig i-pod would go a long way for her. Money is always an issue, but I want to know what is the (nearly) absolute best way to listen to well-reproduced music on an i-pod; we'll scale down from there if necessary.

For your information: My "reference system" consists of Stax electrostatic headphones, an Adcom power amp, an old (it needs replacing) Adcom CD player, and MIT-500 interconnects. Great "portable" system for when I'm out of town for a month or two...

My sister is a good girl; I want to stear her in the right (audiophile) direction. Thanks in advance for your help.