Just chiming in but...
I keep hearing people say that the Touch skips on lossless but I just don't hear it. Half of my 1G Touch is lossless and I hear no skipping whatsoever connected via the dock to a 3move, and to a se530. I haven't heard any skipping since 1.1.4 I believe, when I bought it.
I have some lossless ripped from iTunes directly, and I have some ripped by dBpoweramp, and they all don't skip for me. Maybe I'm just lucky.
Personally, if you want just pure audio quality through the headphone out, I would get the S9. If you intend to get a amp, you could still get the S9, but I think coming out from the LOD, the Touch is better, but that's just imo from the listening sessions I've had with a friend's S9. All flat EQ by the way...no EQ, BBE, or MachBass.
Edit: My longest track in ALAC is 15mins 6secs and that doesn't skip. Maybe people are listening to longer tracks than this...?