There really is no need for new hardware for a DJ iPod, if you want to change pitch etc. it only takes a software update.
As for mixing within one machine (and not hooking up two iPods to a hardware mixing desk, which of course is possible and people already do it), you need proper DJ software and a screen big enough to handle your file list, the mixer, pitch control, overview... in other words: You take your iBook, PowerBook, whatever and use software like Native Instrument's Traktor (
http://www.nativeinstruments.de) to control your internal or external harddrive's (or iPod's) song collection. Traktor lets you pitch, synch songs, everything a hardware mixer does and more.
The iPods's wheel makes you think about DJing, of course, but a DJ iPod would basically mean a large iPod with two wheels, mixing hardware and pitching etc. via software. The thing would need a larger screen as well. It would sure look very cool, but let's face it: It would come close to a 12" PowerBook in size or at least wouldn't be portable enough anymore. On second thought, it would look *very* cool...
Another possibility would be a software update and a new dock with two stereo outs and a headphone out, that's the minimum need for a DJ. I am not sure if handling the pre-listening tasks, cueing and all that on the iPod screen with only one wheel would be fun and practical, but it could be a reason for some DJs to finally by an iPod. You'd have to hook it up to a hardware mixer then.
And for the quality bit: If you use MP3s only, you can adjust the sound system to get the most out of it (if you mix vinyl and MP3s, you're in sound adjustment hell...). It'll never beat vinyl, though, but that's the price we all pay anyway and that's the one argument that the record industry never thought of in their "fight" against piracy... The ongoing loss of sound and dynamic quality in recordings we pay for.