I like good quality sound (I have NHT speakers with a Yamaha or Denon receiver on my HT, all balanced). Given that, I still find 64 kbps Atrac3+ fine on my HD5. I tried a few settings with a few headphones, and things sound fine. Even after 2 weeks of listening to various music, it sounds fine. I am enjoying the nuances of aerosmith's dueling guitars, the roughness of Janis' blues, etc. and it all sounds great--solid bass, cymbals seem clear and not irritating, voices sound natural. I haven't been noticing any artifacts at all.
BTW, I am also using Sony MDR-A34 headphones, and would recommend them highly. They are the verticl in-ear type with a very thin folding headband. (I have another similar Sony pair that doesn't fold and which also sounds great.) Plus, these phones are very efficient--full volume is way too loud, even in a noisy environment.
Also, I am getting a ton of music onto my player at 64 kbps. And when listening in quiet places, it still sounds clear and enjoyable.