I don´t have an iPod but about two years ago I visited local hi-fi exposition/show. In one room, where I was listening Dynaudio speakers, I noticed that there was a hi-fi device with iPod plugged into it from the top. It looked like this: http://www.stereophile.com/digitalprocessors/1008wad/index.html - maybe it was this very machine. So the theory is that if hi-fi manufacturers consider iPod as a source of signal its output quality shouldn´t be bad at all. I didn´t listen to it though. I was interested mainly in the Dynaudios in the room and was listening to music I had brought via some classic CD player.
However the reviewer in the article I linked above is saying goods things about iPod sound quality.