Personally, I don't have a problem with compressed (mp3 type compression) audio quality. I don't think the ipod sounds too bad either.
I bet in a controlled environment you'd struggle to find anyone who can tell the difference between 320kb MP3 vs. WAV or even 192 vs. Wav. Time and time again people have failed in double-blind tests to tell the difference in high end audio equipment and supposedly superior audio formats.
Dynamic range compression is however another matter entirely - imo it's most of the reason behind why people still claim vinyl sounds better (it's the only sane reason i can think of). A quick waveform analysis of a modern CD will show you that nowadays they compress CD's literally to levels of distortion (you'll notice flat peaks at the loudest parts). That WILL make a difference in sound quality just as driving an amplifier too hard will.
www.theaudiocritic.com is an excellent site, this article in particular is a favourite of mine: