As far as they are concerned, 320k mp3 with skull candy earphones is as good as it gets.
I've got what I would call a "high end" system (it's really more of a "high zen" system), BUT I also often listen to music in 256kbs via some nice $100 phiaton earbuds. I've been an audiophile since the mid 1980's and I can sure as hell tell quality equipment from rubbish and to my ears an iPod playing 256k and my phiaton earbuds sounds pretty excellent. In fact, it sounds way way less distorted and clean than any boom box that teens from my youth listened to.
I've got a pair of high end headphones, AKG K702s and a nice headphone amp as well. Playing CDs through that system is sublime and the iPod is inferior, but the iPod is still shockingly good and highly entertaining. I don't look down on anyone that is happy with it. I could be happy with it myself if I didn't have the luxury of better.
I think there's a lot of misguided hype regarding this issue by the audiophile community. It's really a bit of a shame because the audiophile hobby is a dinosaur. Look around at the next 2 channel audio show you go to. Bunch of really old dudes my friend. Where's the only growth demographic in the hobby? Head-fi. Where do head-fi enthusiasts come from? iPods. I hear a lot of audiophile pontificate about educating the next generation about our great hobby and bringing in new young enthusiasts. iPod is the gate way for that and many audiophiles instead are smugly condescending. Not really all that welcoming for those new recruits.
Just my 2, 3, 4, cents. Sorry, rant over.