There is such an option in iTunes for my iPod. Did you guys try this option, can you hear the difference of your songs after this converting? It seems like I can't hear the difference, but still kind of psychological thing spin in my head saying "Your sound quality isn't good as before".
What exactly is your question? When you check this option, iTunes will convert all of the songs it transfers to your mobile device to 128 kbps AAC on the fly in order to conserve space.
There is without question less audio data present in compressed files. AAC is a fairly good compression algorithm, but whether or not you perceive a difference is entirely dependent upon your personal ear.
Personally, I can tell a large difference between uncompressed CD-quality and 128 kbps. I'm a trained musician with a decade of experience, if that makes any difference. Most people don't notice (which is why marketing companies will tout even 60kbps as being "CD-quality"), and the difference will be even less if you're just transcoding from 256kbps to 128.
Also, crappy 10 cent earbuds aren't generally going to be capable of delivering all the nuances you'd hear at a higher bit rate in the first place, assuming you're using that and not something better.
Yes, there's a difference between 128kbps and lossless but you need something more than iPod to notice it. For all iPod users converting into 128 is a good way to save disk space for example.