Some MP3s really stink because of the really awful encoding out there. I have never encoded using iTunes, so I don't know if it is reasonably good or not at encoding. I would think you would want variable bit rate and so forth--and I'm not sure it has that. And I don't know how to control the dynamic range.
The real key is what kind of equipment you listen to the MP3s or AAC files with. Cheap headphones plugged right in to your computer or iPod (including the iPod's own earbuds) are not going to reveal too much of the loss incurred in the process, especially with AAC files.
If you get nicer headphones, and use high-quality headphone & stereo amplification, you will definitely begin to notice the "lossy" file formats compared to original sources. Still, 192kbps AAC files seem to be right up there near source-quality, as are LAME alt-preset MP3s.
I agree about the early CDs. The first CD masters were often made right off the old LPs, instead of off the original tapes! Led Zeppelin IV is a prime example -- the first issue of this CD sounds absolutely terrible. As with all music, you just have to look around for what works best on the equipment you have.
--Chris
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