Whilst this topic has been discussed before, new devices do keep coming onto the market, so IMHO it is worth asking for an updated view.
I've been using one of
these for a couple of years. It gets regularly soaked in sweat and rain (I use it whilst cycling), and is now starting to be unreliable (reboots randomly). The supplied headphones were naff, I use some Sennheisers. I attached a lanyard to it through the microphone slots.
The internal LiIon lasts for around the 8 hours they quote (never actually measured it, but that seems about right). Downsides - the radio is rubbish, and playlist support is non-existent. It seems to play things in the order that you saved them onto it, but not always. Doing a drag-drop of an album can result in odd playing orders depending upon the software you use to copy it over (it acts like a USB drive)
Now I'm looking for a new one. I don't mind a rechargeable - on long rides I carry a 4-AA cell USB charger anyway for my GPS. Charging the GPS on overnight sections (when I need the backlight on) and MP3 during the day works fine for me - but the MP3 must play when being charged. Actually, for commuting use I like the rechargeable bit - just plug it in at work or home and forget about it, rather than carrying spare cells or having to pull out a rechargeable AAA to recharge it.
I'd like playlist support (m3u, whatever) - that seems missing from almost every budget player.
I'd like a display - sometimes I want music, sometimes I want audiobooks, and I change mid-ride, so need to see what I'm doing.
Capacity - 1 gig or more. Shouldn't be a problem nowadays.
It needs to be reasonably rugged. It
will get soaked in sweat and rain (not submerged, just sitting next to sweaty skin). This is what puts me off iPods - I'd be far too worried about damaging one to use it seriously on the bike.
Sound quality isn't a major issue as long as it isn't atrocious. I use it on low volume music or audio books, quiet enough to hear external noises means I'll not hear tiny nuances in the music anyway. Similarly I don't care about the included headphones - I have some that are comfortable, easy to use on the bike and sound good enough.