Depends on the encoder, but 128kbps is still not good regardless of format.
Apple added a bunch of higher bitrate (256) songs, I think they designated it +, although I haven't used iTunes in a while so I don't know how many songs are available (I was thinking though that most had the option of the + for like an extra $0.30 though, so songs were $1.29 instead of $0.99).
There's been rumors that they're going to add 24 bit, likely lossless. I'm mixed on that, as right now the biggest issue in sound quality isn't the bit rate/depth/etc, its the mixes that are destroying fidelity. Maybe pushing higher quality will lead to them doing something about stuff like that.
I also wish Apple or some company would put some money into developing a binaural processor (or license it, like Smyth has been trying to do with their tech), which would be a perfect fit for iPods where the listening is done primarily over headphones.