When you 'rip' your CDs into computer files (for an iPod owner, typically using iTunes) you have a choice on what format and what bitrate the resulting file will be. The iPod can play all the formats that iTunes can encode.
Looking at iTunes right now, I see that it can encode into:
It's all there in iTunes - just look in the preferences, at the "importing" tab.
I'm a pretty demanding listener, and I use AAC 256 to encode my music - I can't tell the difference between that and a CD. But if you are really a fanatic, go with Apple Lossless - it's exactly like the CD, but saves (by my memory) half the space.
Why don't you give it a try? Just go to the iTunes download page, install it, and try it out on some of your favorite music.
Good info. I didn't realize that an iPod did anything but lossy compression, but now I see that they do.