Step 6: How does that work? And where do I go from here?
This circuit works using amplitude modulation, exactly like AM radio, except using a visible light wavelength instead of a radio frequency. The audio signal leaves the iPod as a varying voltage which forces a varying current through the laser. Then the laser's varying brightness conveys the musical information. Finaly, the phototransistor varies in resistance as the brightness on it changes. The mic amp applies a small voltage to the phototransistor and amplifies the resulting current.
A problem with this system is that at each step there is a non-linear transfer function, that is, there is distortion that occurs because the brightness changes are not always proportional to the change in voltage applied. See the screenshot below for an example, and listen to the attached audio sample.
The next step in this project would be to use pulses (like fast, computer operated morse code) to convey digital information like text, crystal-clear audio, or even video. One could even network computers with laser beams in a manner similar to fiberoptics but in open air. I will post C code for my transmitting and recieving programs.