Iphone - MP3, AAC (128 kbps) and AIFF (Apple Lossless)
Just to be clear, AIFF is not the same as Apple Lossless. Apple Lossless is akin to FLAC—a lossless compression that cuts files sizes roughly in half, compared to fullsize AIFF or WAV files.
Is converting a Flac file to AIFF okay without losing quality?
Yes, you can convert between lossless formats without degradation.
For hard drive storage, use a lossless format like FLAC or Apple Lossless. For portable devices with limited capacity,there's a trade-off. I use 192 kbps AAC for iPods. I wouldn't claim that's perfect, but it's good enough for the way I use iPods. The earbuds you use probably involve a lot more degradation than the codec you choose.
castanets.wv is the de-facto test signal.
It sure is, but that also makes it perhaps an inappropriate test from a practical standpoint. For the consumer, the right question isn't, what bitrate makes the killer files transparent? It's, what bitrate makes the music I typically listen to transparent?
Adding on, if you have a choice of using AAC and MP3, ignore MP3. AAC is superior to it at the same data rate (and even somewhat higher).
Definitely true at lower bitrates. I'm not sure I'd place bets on listeners preferring 256 kbps AAC to MP3, however. You'd need to be verrrry selective about both test subjects and files.