This for those questions people have asked as it wasn't covered in the documentation
No, there hasn't been much interest in handling mp3 with ices2. The older version ices 0.3 maybe of interest in such cases.
IceS will read from the DSP on the soundcard, but where that gets the audio from depends on the mixer settings. Use a utility like aumix to see the settings and change the capture or recording device. Usually the default is the Mic
Ogg Vorbis is a lossy compression technology, so quality of the sound is reduced, however with live input the source of audio can be poor depending on the soundcard and the system it's in. As an initial test just record a wav file from the DSP (using eg rec, arecord etc) and listen to the quality of the audio recorded. If the source of audio is poor then encoding it to Ogg Vorbis is not going to improve it.
The reasons for poor audio from the DSP can be difficult to resolve, search for information on audio quality. It could be driver related or maybe some interference from some other device.
Here are some links where further information can be found:
http://www.djcj.org/LAU/guide/index.php