The best-sounding headphones for the money are the sort used with regular stereos, from manufacturers like Sennheiser, Grado, and AKG. They sound great, but if you want to use them with an iPod you will need a headphone amp (see below), and they can be loud enough to disturb people sitting next to you. Noise-canceling phones have circuitry that negates ambient sound electronically, but a lot of noise does come through (although these phones can be excellent for screening out the drone of jet engines on a long flight).
My favorite headphones for listening to portable music are the smallest—ones that actually fit in the ear canal. This means they block sound much more effectively than noise-canceling phones, so effectively that you should not wear them while riding a bike, for example. They do take some getting used to, and not everyone will like the feeling of having them in the ear. The best models come from Ultimate Ears, Shure, and Etymotic. Individual taste will vary, but I came to really like the feel of the Shure E5c (about $499 online) and never did take to the Etymotics.
Because they are custom-made, the Ultimate Ears have the virtues of in-ear design without any discomfort. The UE-10 Pros ($900) have a transparency and immediacy that is uncanny—the music really is coming from inside your head. They're so good, I now look forward to subway trips as a chance to really listen to music. I found the Shure E5cs a bit too bass-heavy, but for a bit more than a third of the price of Ultimate Ears they produce first-rate sound, particularly for rock and rap. If you're looking for value, the $179 Shure E3cs are a good option. If you don't like the in-ear approach, the Sennheiser PCX250 ($130) noise-canceling model is a good choice.
When I took on this assignment I didn't know headphone amps existed for MP3 players. Since MP3 players just don't have the juice needed to drive bigger headphones, these small, battery-powered amps are almost a requirement if you want high-quality, portable audio.
I tested three amps, one designed specifically for iPods called the Simpl A1 ($149) and two made by HeadRoom, the Total BitHead ($269) and the Cosmic ($729). The Simpl A1 allows you to use the home headphones, but it didn't significantly improve the sound of in-ear phones like the Ultimate Ears and the Shures. The HeadRoom amps were astonishing. They are engineered to direct a bit of the sound from the left channel to the right, and vice versa, to mimic how we hear live music. You can turn this feature on or off, but once you turn it on, you'll leave it on. Listening to Jerry Garcia and David Grisman on "Russian Lullaby," you get a vivid physical sense of the notes reverberating within the sound boxes of the guitar and mandolin. Arleen Auger's rendition of Handel's aria "Piangeró," a soaring lamentation, becomes almost unbearably moving.
Size is an issue: The less-expensive Total BitHead is the size of a pack of cigarettes. HeadRoom sells a light carrying case you can wear on a belt or carry in a coat pocket that holds the amp and an MP3 player. The Cosmic is twice as big and requires four D batteries in a separate holder.
Listening to music encoded in a lossless file format with Sennheiser HD650 headphones ($450) and the HeadRoom Cosmic amplifier is sonic bliss. There are two problems with this "perfect" portable audio system: It'll cost you $1,200 before you've even bought an MP3 player, and you'd need a small backpack to tote everything around. If money isn't an object and you want a system for your desk or an afternoon in the hammock, this is a superb setup. (You could also save several hundred bucks by subbing in the Total BitHead amp.)
If you want something for moving around, as most of us do, then the ideal combination I found was the Ultimate Ears 10 Pros and the Total BitHead amp. This setup is small enough that you could use it during air travel or while commuting by train or bus. A less expensive but still fine option would be to replace the Ultimate Ears with the Shure E5cs. If you travel a lot, make plenty of money, and can expound on the tonal differences between B.B. King playing a hollow-body Gibson electric and Albert Collins stinging out the notes on a Telecaster, this is the choice for you.