My (limited) understanding of MP3 compression is that it works on psychoacoustic principles. That is to say, when a track is ripped, it's spectral analysis information is compared to a psychoacoustic model stored in the encoder (what the encoder thinks you will hear). Any frequencies the encoder decides will be inaudible, are removed. This makes for great compression, but what about sound quality?
Some of the sounds an MP3 encoder removes probably don't make much difference to the average listener. Much of the time, though, the overall 'feel' or 'sound' of a song relies on VERY subtle factors (vinyl freaks know this, while CD enthusiasts seem to have forgotten it). MP3 compression removes a lot of these sounds. For example, if two notes sound at the same time, and one is much louder than the other, the softer sound is taken out. Also, as has been mentioned many times, the bottom end and top end are lacking.
As a result, casual listening (i.e. on headphones at work) is rarely affected. At high volume or on a good sound system, however, much of the warmth and expressiveness of a song is lost.