See discussion at http://forums.sandisk.com/sansa/board/message?board.id=clip&message.id=9380
I encoded one of my favorite tunes using quality 3 setting (~112kbps). It plays absolutely crystal clear on my PC but it pops and clicks on the Sansa Clip. Ugh.

I'm not one of these audio nuts with $1000 headphones. I honestly can't tell the difference between CD quality and properly encoded 64k.
So stuff open source and freedom. I'm now using the clearly superior Microsoft WMA format. It's awesome!!
To me, the lowest setting on WMA variable sounds fine. Granted it doesn't sound precisely the same as the original CD but if you listen to it in isolation you wouldn't know anything is wrong with it, and this way I can fit about 80 CDs on my 2G Clip.
Update : After sitting with my eyes shut and playing a track over and over I've finally come to the conclusion that the second lowest setting (50 - 95kbps) is indistinguishable from the best setting in WMA variable bit rate so I'll encode everything that way.