I'm sorry to tell you that the Ipod does sound crappy. I had a gen3 and it had the same problem (that was presence since gen2). I tried really hard to find a way to fix it, but there was no real fix. They did came out with some new firmwares that suppose to help the problem a bit, but it didn't help much at all.

I tried to warn many people that ipod sound quality sucks after I bought mine, but I guess most people take the cool factor over the sound quality and ignored my warnings.

I also have seen many misleading statements concerning sound quality of the ipod from various sources (including CNET).