Your question was well timed! In its February issue, the German computer magazine "c't" (the most professional computer magazine on the German market) did a big test of several MP3 encoders. To judge quality, they both used measurement equipment and subjective listening test. For those listening tests, they invited some of the best audiophile professionals.

They compared the Fraunhofer codec (professional version - the Microsoft version cannot encode to high bitrates), Xing, LAME, and as an implementation of the ISO source code, BladeEnc.

Result: If you encode with fixed bit rate, Fraunhofer is still best, very closely followed by LAME. Xing is somewhat weaker here. If you encode to VBR, Xing is best, again very closely followed by LAME. Fraunhofer has its problems with this. BladeEnc produces much worse results under any circumstances, due to serious error in the psycho-acoustic model it's based upon.

If you set Xing's VBR so that the file size is about the same as a Fraunhofer-encoded file with fixed bit rate, the Xing sounds a little better, they say.

Most people they asked couldn't tell if they were hearing a Fraunhofer 128kb-MP3 or the original CD. They used top-notch audio equipment for the tests. (Personal note: "most people" isn't good enough for me, and in my personal direct A-B tests with 128-kb-LAME encoded MP3s, I could hear a difference, so I decided to go with 160kb.)

The Fraunhofer codec (with high bitrate encoding) is available as part of MusicMatch Jukebox above version 4.2. The Xing codec was in MusicMatch until version 4.2, and is in AudioCatalyst. LAME comes in a DLL as part of AudioGrabber, which is an identical twin of AudioCatalyst (except for the codec) or as a stand-alone program for free.

So, if you're on a tight budget, get LAME. Otherwise try Xing with VBR or Fraunhofer with fixed bit rate.