It's also amazing to me how many people who claim to care so much about audio quality yet they purchased a portable MP3 player.
You know that you can use Apple Lossless codec right?
I'm an audiophile and the iPhone is good, but not perfect. There are better quality MP3 players out there, but at the moment all my songs are encoded at VBR 256kb MP3 (I don't like AAC) and the quality is pretty good. If you want the best possible, use Lossless or uncompressed (kind of defeats the purpose of having a portable player though, songs are too large).