You're never going to get CD quality out of an iPod/iPhone. Mostly because the audio circuitry in them is crap. I've never heard a worse portable device.
This is actually a complicated question. Everything these days is recorded, mixed, mastered, not for people listening through good sound equipment in a quiet room. Instead they tailor the sound to the devices most people are using nowadays. This means that you're listening on portable devices in loud places. So the mixes are compressed(dynamic compression as opposed to file compression) and EQ'ed to fit with these crap audio reproduction devices. So, take that into account when you're listening and comparing.
Back to formats and codecs. FLAC is my favorite because it's open source and lossless. No way Apple would ever supports such a thing. Apple Lossless(ALAC) is the next best thing. Don't be mislead, your music is still being heavily compressed, but ALAC doesn't remove any information from the sound file like mp3, etc. File size for ALAC will be about 40-60% of an equivalent uncompressed PCM file.
As for whether you should convert old files to FLAC or ALAC, you should consider the original source. If you have mp3s that you've downloaded with Limewire or something, don't bother converting them. The damage is already done. So, unless you have the original cd or another trusted source to get the file in PCM and then convert it, you would just be wasting space on your portable device.
I'm a Sound Engineer/Designer, so I could talk about this all day, if y'all want. I'm actually doing some of my graduate work on high-fidelity audio formats. We've regressed so much since the day of a hi-fi and vinyl. Most people just don't realize it.
Man, your expert advice is appreciated. Anything you can "learn" me on when it comes to formats and the potential quality of stored music, well, I am all ears. I am always on a quest for great sound in a vehicle. Well, and the ability get insanely loud still makes me smile as well. I know the two don't always mesh, but anyway...
A lot of "casual" music listeners who love their Ipods tell me that they can't tell a difference. I am able to change every single one of their minds once they hear a back-to-back comparison in my ride.
I sometimes run around with two Ipods hooked up (the girl's and mine), and it's cool for the shuffle feature. Like listening to a radio station with songs that I know I like. But when I want to impress or be impressed, or jam out and hear every single pluck of a guitar string, or distant "ticking" or "tapping" or even subtle vocals where the artist threw in a faint "ya", or "uh huh", or whatever, I always reach for a CD. Actually, my favorite audition material is an Eagles concert DVD in 5.1. Even without a center channel (for now), the experience is amazing.
Which I guess brings up a whole 'nother question. If I download DVD stuff onto my Ipod video, like that concert DVD, will I be able to get the same format/quality? I'm guessing it would take up gobs of room. But is it doable?
EDIT: Dude, I'm being a little bit "liberal" with my "quotations", aren't I? lol I'm drunk.