You might want to try using your dock (if you have one) or the belkin auto kit in your car to see if you hear an improvement (both feature a line-out which bypasses the headphone amp, improving sound quality).
FM transmitters at there best will still only sound like a FM station. The iPod-in-Car Solutions sub-forum in the gear section will have a lot of ideas, opinions, etc. about setting up your iPod in your car, so a search there might help you out.
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