difference between ipod models in sound quality ?

None, they all sound bad.

For what they are they are pretty good not as good as a cd but it depends on your encoding. I use it all the time for music in the house and have have had various models. The 2nd and 3rd gen models sound the best I think, a little light on the bass but if you turn on the bass boost it is better at least with my etys headphones. If you use a headphone amp or go into a preamp no need to do this. I just got a nano and the sound stage is not as big and seems to cut the highs and lows a bit, but the bass issue is solved it is a more neutral sounding. Hope this helps a bit.

Contrary to the above posters, I have a 4th gen 20 Gig model and enjoy it very much.
I use the amazing Koss 35 clip on earphones (discontinued).
I save music @ 192 kbs.
Sounds great for portable use.

No it is not the same as my rig at home, but if that is your criteria, then you will be disappointed.
You can always save music to the IPOD at full CD quality if you wish.

A key to decent sound is decent aftermarket headphones.
I have not heard there is a significant difference between models.

Believe it or not but iPods are the future of a desctop digital components.
In pro audio it's widely being used with great success.

I have a 3rd generation 40Gb iPod and play classical music at 320kbs through Etymotic earphones. It is good enough for my commute, but it doesn't compete with playing a CD through my Sennheiser 600s.

I am not sure I would ever want to connect it to my home system, but it is a fine sounding portable player where the headphones and external noise are the worst impediments to a joyful listening experience.

I always play at reasonable levels to protect my ears and am amazed when I sometimes hear other peoples personal music louder than my own music. The - universally young - guys are unlikely to be hearing very well when they reach my age!