I've had an 80GB iPod Classic for over 6 years but I find myself using my phone for music more than my iPod these days. The storage capacity of the iPod Classic is a major plus, there's little out there that comes close to it (160GB is the standard now). However, I find that just copying a few albums onto my phone and switching them around is more convenient, no point having both my phone AND my iPod when going about my daily business.
And yes, Apple earbuds that come with iPods sound bad. And that's comparing them with a pair of mid-range Sennheiser earbuds and a pair of Philips earbuds I have.
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