In my experience, I have been able to hear a difference between MP3 and CD. I don't rip stuff at 128k (I go closer to 192k so that it is tolerable for background listening), but even at the bitrates I use I can hear a difference between compressed and the original CD.

What mode are you using on the 970 when listening to each? I could see a possible scenario where MP3 in straight stereo might be preferable to CD in a matrix surround processing mode simply because many people (myself included) prefer music in two-channel mode.

i was listening to MP3 in straight stereo and then in bypass mode on my 970

What about CD's?

cds in 2 channel stereo. i can't do bypass because it is connected to PS3 with optical cable.

I've compared mp3s at 192k versus Apple Lossless on my iPod and I couldn't really tell the difference. I attributed this to the DACs in the iPod as well as the quality of the earbuds, but mostly the DACs. Now I did this comparison using my Nano and maybe the Classic has better DACs.

I experimented with the iPod connected to my 990 via its analog connection (not the headphone jack) but it was pretty poor quality. I don't even use my iPod for background music due to the poor sound quality. That duty is left to iTunes via my router to a Linksys Music Bridge connected to the 990 via an optical connection.

gooomz:

Following this thread makes me wonder if a Squeezebox might make sense for you. Though it would not work (as far as I know) with iTunes MP3s ripped using DRM, you can stream your CD collection in a lossless format (like FLAC) and use the device's onboard DAC, or use its digital out to the 970's DAC. You'll get CD quality playback this way. You can also use the Squeezebox for Internet radio.