My prefered output device is the Bose QuietComfort 2 Acoustic Noise Cancelling Headphones. I bought them for work, and I'm on my second pair. The first pair physically began to break after a few years of almost daily use.
The sound is excellent through both my shuffle and nano, and the noise cancelling works quite well. By itself, the noise cancelling is okay. That with a little music however is enough to isolate me from meetings outside my door at work and even meetings held by my officemate.
I've connected my shuffle to my car and use it that way once in a while. I've also connected my nano to my home audio system, but more for experimentation than anything. Sometimes, especially with podcasts or iTunesU courses I'll use the earbuds, but in the end I prefer to use my Bose.