if your gear is up to scratch, lossy compressed audio sounds... well... compressed. The soundstage sounds narrower, less air between instruments, vocals start to sound less smooth/robotic, bass lacks that oomph, blah blah blah.....
if I was listenin to my sony s739 outside w/ the stock earbuds with the active noise cancellation turned on... yes i'll use MP3s. If i have my imod => amp => IE8, then definately lossless. If i'm at home w/ my balanced m3/hd650, i feel sorry for my senns if they're not fed lossless....
If you had a ferarri, would you fill it w/ cheap fuel? My rig isn't even up to ferarri standards yet... maybe high end toyota/low end lexus? (i wish... ^o^)