I use a Squeezebox exclusively with my headphone setup. I've been very happy with it.
I haven't tried the analog outputs, only the optical output to my MSB Link DAC. I encoded my entire library to FLAC, and although it was a great deal of time to do so, it was well worth the effort.
I noticed a small improvement in sound quality when switching to the squeezebox, from my old transport (but that was a POS.) I think most of the improved sound was gained by using EAC to rip the discs, allowing for improved error correction. I don't have an expensive transport to compare it against, so YMMV. Check the message forums over at slimdevices, I've heard of a couple people doing some hi-end comparisons...
Mostly, the real benefit has been the flexibility it has provided me in listening to my library. I'm listening to stuff I haven't pulled out in months, simply because I can actually FIND what I want, when I want it.
FYI, you should note that the current release of the firmware and server software are a little buggy. There is a new release due out pretty soon, which should fix most of the bigger problems.
