There are plenty of options for connecting an iPod to a car stereo--increasingly, car makers themselves are offering full iPod control as an aftermarket add-on. But if you're like me and own multiple MP3 players, most of which won't work with the specialized iPod connectors, the solution's different: get an aftermarket stereo with a built-in auxiliary input or (better yet) a USB connection.
Subaru must have thought its customers didn't care about audio. The 2005 and 2006 Outbacks and Forresters came with decent-sounding stock stereo systems, complete with 6 CD changer. But for some unfathomable reason (probably cost-cutting and lock-in, as this poster suggests), the company connected these factory systems to the climate control panel, meaning it's insanely difficult to swap them out for a new stereo. So difficult that your typical McStereo installation place probably won't do it for you.
After making this unwelcome discovery, I've spent the last year or so messing around with various FM transmitters. You connect these devices to your MP3 player, and they broadcast the signal over an "unused" FM wavelength so you can pick it up on your radio. Only one problem: I've never seen one work very well. If you live in an urban area with lots of radio stations and telephone lines, you'll get interference, fade-outs, and random bursts of static. Unless you're willing and able to hack your transmitter, you're pretty much stuck with a frustrating listening experience.
This weekend, I'm going back to the drawing board and trying what this blogger suggested: an FM modulator. Similar to an FM transmitter, these devices let you connect an auxiliary output from an MP3 player (or any other device) directly to the stereo's internal FM receiver. Because there's no over-the-air transmission, you can apparently avoid the interference problems. It's only FM-quality--but most my digital files are compressed anyway. It'll probably run me around $200 installed, which is a fine price to avoid terrestrial radio and the frustration of an FM transmitter.
UPDATE: Apparently, the 2007 Outbacks do have an, not just an iPod connector option. Apologies for my prior error, but that still doesn't fix the problem for us '05 and '06 owners.