On the MP3 issue:
You need to remember that not all MP3 files are created equal. You need to look at the bit rate of the sample, which can be anything from 64kbps to 320kbps. More is better here, and the higher the bit rate, the larger the file.
I personally don't download files for burning if they're less than 192kbps, as I find the degredation of sound, particularly in bass response and treble definition, to be too much to bear.
On the headphones issue...
A decent set of in-ear headphones can be surprisingly good, but on sheer sound quality full-size headphones will always beat them.
What hasn't been mentioned is that headphones are about two things: the supply of noise (music) to your ears, and the reduction of background noise, and this complicates matters further.
In-ear headphones will effectively damp out a lot of noise, but tend to do it by being able to inject the music into your ears. Any high-volume, high-pitch external noise will go straight through them, and the result of this for me was that I found it difficult to hear my music whilst on an aeroplane recently.
Of the full-size headphones, there are two types: open- and closed-backed. The open-backed headphones tend to sit against your ears, are very comfortable for extended periods, and given an open, airy sound, but you pay for this in reduced noise cancellation. Sennheiser do very good open headphones. Closed headphones tend to fit over yourears, so are immensely uncomfortable if you have big ears. The sound tends to be heavier and more forced, although the noise cancellation is much better.
I know Bose do a pair of active noise-cancelling headphones, but I think they're like $500 a pair!
Finally, if you care, there is a direct relationship between the cancellation to you of external noise and the 'leakage' to the world of your music.