I have an 80GB iPod classic and use LAME v3.96.1 APE (don't ask why I haven't updated) and can confirm that the gapless feature of iTunes/iPod works flawless.
Sounds just like the original CD when using it in my car and with my headphones.
I had a 3rd gen (the dock iPod) and this thing blows it away in both features, battery life, looks and sound quality.
I highly recommend it.
JXL
QUOTE (MichaelW @ Jan 4 2008, 12:26)

Just checked my Classic (160GB) on _Dark Side of the Moon_ and a bit of Wagner. Fine.
Tracks encoded with Lame 3.97b3. I feed my iPod with iTunes on Mac OS X. There is a stage in which it says it's checking for gapless information. I don't know whether it's iTunes that does that or the iPod itself.
I still have not got all my unpopular music tagged properly
Michael
If you right click on an mp3 file or group of files, and select "Get Info" there is a checkbox under the options tab titled "Part of a Gapless Album" place a check there. It adds a value "iTunGap = 1" in the id3 tag.
JXL