I always find that the target device is the most important factor. On my home stereo I can here the difference sometimes between 128K and higher bitrates. On portable devices I can never hear a difference.
IMO, ripping cds with 128kbps aac is fine. 128kbps mp3s sound like complete crap though. if you are using a big-sized home stereo, you should probably go with 192 aac. so for an ipod - no, 128 is fine.
I usually have it set to 160kbps AAC, 320 if it's something important. Video files infiltrated my iTunes library with all that giggage so I don't have room to record everything in 320kbps
The only draw back to high bit rate is file size. rip the same song a few different rates and if you hear the difference go with the higher quality. If not, then go with the lower rate so you can fit more songs on the ipod.
Describes a file that still has all of the info that was in the original you ripped. MP3 & AAC are lossy compression formats. There are a few lossless formats, but for an ipod you need Apple Lossless. Checkout wikipedia for more info
Essentially MP3 and AAC are "lossy" codecs as they alter the waveform in the process of compressing the data stream, they use a system called Perceptual coding to try to measyre what you would hear in the mix, then they mask the stuff it's assumed that you can;t hear. It works to an extent, but alters the sound of the recording.
Lossless compresses the data size but is able to recreate the waveform almost identically so the track sounds the same as if coming off CD. the drawback with lossless is that the data savings are typically 50% at best, so the files are still very large when compared to a 128Kbps MP3.
All my audio is lossless encoded, but then I'm an audio professional and have very good ears, very clever headphones and a 160Gb ipod.