What is the best compressed iTunes format?

Doesn't ALAC cut file size by about 30%->35%? Cutting by half while 'suffering' the loss of quality of even the best bet in MP3 using VBR and 320KbS base rate?
I'm not sure the marginal saving of disk space is worthwhile....at least not for me.
I'm well served by double copies, and ALAC for the house and MP3-160 for the car / pod.

Storage these days is CHEAP. Having a PAIR of backups may not be a bad idea and a terrabyte is a massive amount of music. I don't know current state-of-art, but RAID systems....RAID5, for example, are reasonably safe and redundant though at a COST! $$$$ I would only backup ALAC or other bit accurate copies, NOT any MP-3 which can be easily redone.

The OTHER advantage of MP3-160 is that most (all since say.....'06 or so) car CD players handle this format just fine, thank you, so you can leave the 'pod in out of the loop when driving.

Here's an interesting happening. I have my 30GB iPod at work loaded with the down converted 128 AAC format and last night I loaded my old 8 GB iPod with the Apple Lossless that is actually on my computer. I brought both iPods to work today and handed them to a coworker that's in to music (about the only guy I know that's into vinyl) and asked him what he thought. Ironically, he strongly preferred the sound of the iPod with 128 AAC and described the sound a being more full. I had to laugh. I can't say that I can really tell a difference.

Are all iPods created equal? I believe they are of similar vintage, but one is a standard one and the other is a nano (I believe). The standard iPod was the preferred sound.

I put the iPod with Apple Lossless on my Onkyo dock last night and it was the first time that an iPod was an acceptable source for at least background listening. It wasn't nearly as good as the CD or SACD players, but but improved over the MP3s on my wife's iPod.

All iPod's are not created equal. They use different DACs in different ones. The 5G, 30GB iPod video uses a Wofson DAC. The current models use a proprietary DAC that Apple developed themselves, I think. Its not Wolfson, I know that. There are also differences in power and cicuit design.
I have not done a test like this, but let me ask a few ?s:
Was your vinyl guy listening to the same song on both iPods?
Does this person have an iPod himself, is he used to having earbuds in?
The difference I hear between lossless and compressed iPod files is in the extreme frequencies - there is more detail in the low/high end with lossless files. Its something I had to listen for, and its more noticeable on some tracks than others. For example, the re-mix that Jimmy Page did on the entire Led Zepplin back catalog did not reveal more dynamic range in the recordings; this is not music I would recommend for a test like this. Tool is good. Electronica or IDM is good. Classical would work.
I have never A/B'd lossless vs. compressed in a blind test, then tried to ID the lossless rip. I will try to do this soon. I might surprise myself, and re-rip my entire library into 128 .mp3.
Eh...Probably not!
Also consider that Apple Lossless is not really lossless - it is a variable compression at a very high average bitrate, using a very efficient codec (MPEG4 I think). AIFF, WAV and FLAC are true lossless formats. Not sure if this would have made a difference in your test, but that was great to read about.

My coworker listens to headphones at work often and isn't an iPod owner. I set him up to listen to the same song that came from the same CD and iTunes computer. I didn't tell him anything beyond giving them both a listen and report if he heard any difference.

The funny thing was that he wanted to know what was different in the two iPods that could make them sound so different (this is my reading between the lines paraphrase). It was clear that he heard a difference and said the 128 AAC sounded fuller.

A test doesn't get any more blind than this, but this isn't a perfect test. Maybe I'll revese the files and let him try it again and see if the iPod rules or if the format rules.

ALAC is indeed 'lossless' in the sense that you can re-create a bit-accurate copy of the original file.....from the ALAC file.
The very definition of lossless: