There's no simple answer to your question. It's like asking what's the audio quality of vinyl.
The iPod can store CD-quality audio files, as Tarsando said, or compressed files that trade off audio quality for convenience in degrees according to the amount of compression.
The limiting factors in the audio quality of the iPod itself are the quality of the amplifier and digital-to-analog converter inside the device. You can bypass the amplifier by using a line-out connection from the dock connector but bypassing the DAC is, at this point, an expensive proposition.
The iPod can store CD-quality audio files, as Tarsando said, or compressed files that trade off audio quality for convenience in degrees according to the amount of compression.
The limiting factors in the audio quality of the iPod itself are the quality of the amplifier and digital-to-analog converter inside the device. You can bypass the amplifier by using a line-out connection from the dock connector but bypassing the DAC is, at this point, an expensive proposition.