Death? Limbo? Studio 54? Jeanie’s bottle?
I’d say Jeanie’s bottle. When they are tired they can always go into the pokeball and next time they come out they are fully rested, so there’s probably a massage parlor in there as well.
I always assumed that pokemon were put into a state of suspended animation inside. Which makes the life of the average pokemon a very sad one if that is the case. All they know is battle. 
Robot Chicken asked the same question…
If you think too much about Pokemon as a concept it gets very disturbing. Pikachu is quite the traitor, is he not?
That’s not the case at all! Oh my god, girls don’t know anything!
I’ll second suspended animation, but not all Pokemon owners are trainers for battle, so knowing only battle is the fate for only a few. There are still plenty of wild ones and pets. And the ones trained for battle seem to enjoy their roles.
Sigh… Secret Guilty Pleasure #5. My collection of Pikachus. Several dozen Pikachus.
My favorite had to seated in the pokeball by ramming his hinder on to a spike on the bottom of the ball. It squicked Offspring and I so much that we have released all the Pikas to roam free on a shelf with the others.
But no, to answer the OP, we don’t know what goes on iin there and we don’t wanna.
I’ll concede that. I’ve never been much of a fan. But I still say there is a massage parlor in there with hot asian chicks giving the massages. 
And I’m a guy. :eek:
The Wikipedia entry says the following:
“Inside, the Poké Ball features many of what appear to be mirror panels. The inside of a Poké Ball is supposedly designed to make the Pokémon feel as comfortable as possible while inside it. While never fully explained in the anime, manga or core video games, Super Smash Bros. Melee states that this is done by creating a holographic environment that suits the Pokémon.”
This would suggest against suspended animation.
When a life-size poke-ball is constructed, I want to be the first to know.
Pokeballs are holodecks?
Great. Now I have an image of a Skitty wearing a Sherlock Holmes cap.
What are they like inside ? Death chambers, that’s what they are !
It’s thinly disguised, animated cockfighting, what’s the big deal?
Inside a pokeball … does Psyduck echo?
Now I have visions of Pokemon wearing badges from the Juden gym lined up to get into Pokeballs. A large sign says “Battle Makes You Free”
Not suspended animation. A poisoned Pokemon still feels the effects of the poison while in their pokeball (as long as they’re out of combat - an inactive Pokemon is essentially in stasis during combat). It’s been a long time since I’ve had a Pokemon suffer a burn, but if I remember correctly, burn damage does continue out of combat, too.
Also, in the games, where happiness is a stat, a Pokemon’s happiness levels change while they’re in their pokeball, just from walking with them in your team. It’s the slowest way to increase happiness, but still, it’s a change in the Pokemon inside the pokeball.
I was disturbed to see that one of the google ads in this thread was for an inflatable “I Dream of Jeannie” bottle. And then disappointed when I clicked on it and it wasn’t big enough to climb into.
Ash’s Pikachu generally refuses to enter a Pokeball, so it can’t be all that good.
Then again he also refuses to evolve into a Raichu, so maybe he’s just neurotic.
Ash’s Pikachu is…strong willed. It’s also the only Pokemon who’s been shown to be able to break out of a pokeball AFTER being captured. If it doesn’t want something, it’s just not happening. Ash could, possibly, force it to submit to his will, but he accommodates it. Between Ash just being that kind of trainer (and, it’s been shown that that’s the best kind) and the fact that Pikachu’d fry his ass if he tried to break it, Pikachu gets its way.
Anyway…yeah, Ash’s Pikachu is a unique case, so you can’t really judge the world of Pokemon by it. Even Krabby, or Charmander, Ash’s other strong-willed/obnoxious Pokemon, aren’t bothered by their pokeballs.
Further thoughts on the nature of life inside a pokeball - it’s been shown that Pokemon can be stored or transfered as computer data (Bill’s PC, Ash sending his excess Pokemon back to Professor Oak, trading within the games), and there’s one Pokemon - Porygon - which exists as data in its native form. And when a pokeball opens, the Pokemon is shown appearing as a cloud of energy before returning to solid form to battle, or perform, or whatever it happens to be doing this time.
SO…rather than being a holographic projector, perhaps the pokeball is a small data storage module, converting the Pokemon to data, and transferring them into a simulation of…well, I suppose that might depend on the Pokemon in question. My first instinct would be a simulation of their native territory - Pikachu gets a grassy plain, Horsea gets an oceanscape, Porygon gets cyberspace, Onix gets a cave, etc. But, perhaps, the environment is larger and more varied than that - maybe all a trainer’s pokeballs are networked together, even (which would explain why, when trading, trainers can’t just trade pokeballs). This would allow the Pokemon to roam freely, explore the virtual world, and interact with each other.
I’m pretty sure Psyduck has. And Wobbuffet.