Dear Jay,
I hear the difference in quality between 128 Kb AAC, alt-standard-preset LAME 3.93 MP3, and Apple Lossless on my stock iPod listening via the headphone out.
IMHO the iMod would allow you to more clearly hear those differences. AAC files won't sound bad, but they will certainly sound more obviously what they are, a compressed format. That doesn't mean they can't be enjoyed, and when you have time to re-rip your CDs, you'll really appreciate the results of that effort.
-Charlie