Start with the plug. You can get a stereo signal out of the minijack, but if you're serious about sound you'll use the iPod's 30-pin port. Both sources deliver analog signals, but the port provides "line-out" audio, uncompromised by volume settings that can distort the sound when they're too high or too low.
Does the file format really matter? Yes. Songs are typically compressed using an encoding standard, like MP3 or AAC. The key here is the "bit rate." Higher rates mean less
compression and thus better sound. For the home, invest in a high-capacity iPod, and go for the higher bit rates and bulkier files. When ripping songs from a CD, choose the MP3
format at 320 kilobits per second (Kbps) or "lossless" AIFF. If buying from the iTunes store, look for 256 Kbps AAC.