The iPod comes with cheap headphones. I recently purchased Sony V600s, and the sound that comes out of them is outstanding. I suppose someone with ultra sensitive ears will claim to tell a difference, but I'd like to see Audiophiles who make this claim blindfold tested under lab conditions.
No doubt the headphones make a huge difference. But it's very clear to me that compressed audio just isn't the same as real audio. The dynamic range is audibly reduced as well as the detail in the top end. I don't perceive it as a trivial difference at all.
Of course, there are different degrees of compression. Some compression just totally kills the music, but I guess there are other types that are probably pretty transparent.
Like I said to rdb3, I'm just going to take a listen to an iPod some time.