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!