2nd Gen iPod Touch, latest firmware and my Mac is running Snow Leopard- iTunes and SL bang up to date. I didn't have the error message when trying out the 128 kbps AAC but I did have problems syncing.
First time went fine, converted/synced all my tunes. Noticed that some of the tracks' lyrics didn't work on my iPod Touch but overall not that bothered. However, whenever I'd reconnect the Touch it would re-sync or 'update' tracks that I'd recently played in iTunes since my last sync, as if it had to re-sync to update the play count or something?
It would then run 'Determining Gapless Playback...' for every track every time it connected. AND THEN
p) the message 'Sync Complete' would come up, the iPod screen would return to normal and it would reconnect to iTunes and re-sync again on its own. Tried restoring and re-syncing- no joy.
On the offchance it'd work I tried unchecking the 128 AAC box to just put my standard mp3's back on- touch wood, it's worked fine.
I found the sound quality definitely good enough for me on 128 AAC but I'll wait until Apple's ironed out the bugs in this one.