What is the best compressed iTunes format?

Unless you use the IPod as a hi-end source, MP3-320 is probably the highest you need to go......
In I-tunes, go to 'preferences', 'General', 'Import Settings' and set to your preference.
I, for example, use ALAC then have 2 playlists. One is the lossless files I send to stereo and a COPY of that in MP3-160 goes on the 'pod...for auto duties.

You can COPY any lossless files in your music folder as another, lower resolution format. Set the import settings back to whatever for lower res....It'll leave the ALAC stuff alone, but you'll have 2 copies in your music folder...1 of each.

I'll double check when I get home, but if I am remembering correctly, when you plug in a device to sync, go to the “General Preferences” (or rough equivalent) tab for that specific device and there should be a radial button to check, towards the bottom third of the page, that says something along the lines of “convert higher resolution formats to AAC when syncing.” Check that, and it will automatically do all of the converting work for you while it syncs. In other words, it's a device-specific setting and is not at all related to your import settings. Hope that helps.

Having two libraries, with a primary lossless and then a smaller copy is also a perfectly sensible way to go. For my usage, however, I've found the auto-converting feature while syncing to be both tidier and easier than maintaining separate libraries (which I've tried and gave up on once I discovered the button to ask the computer to do it for you).

auto-converting to AAC when synching the iPod is a checkbox you can click in the iPod's properties when you connect to the computer. This produces 128 kbps files. IMHO this bit rate is too low and you will hear a decrease in quality compared to 320 kbps .mp3 or 320 kbps AAC. I don't recommend this low bit rate, 320 kbps files are not that much bigger in size. I rip the music I love to Apple Lossless, stuff I get from friends is .mp3 and I still have a ton of music in .mp3 format that I haven't re-ripped and probably won't. No, I cannot fit my entire collection on my iPod, but I have 30GB and that is plenty to keep me happy for weeks without deleting and re-loading. I recommend .mp3 over AAC because it is compatible with everything. For example, I cannot network my Denon 3310 AVR to play AAC files, only .mp3...
The shortcut for getting to import settings is pressing CNTRL and , at the same time on a PC. Then click the Import Settings button next to "Import CD" on the General tab.

I'm still looking for the iPods properties, but I'll keep looking.

Also, is it possible to convert from Apple Lossless to MP3 using the existing files and not having to mess with the CDs again?

Right, three things.

First and foremost: yes, once you rip things lossless, you never have to touch the CDs again. Far as I'm concerned, that's the whole point.

Second, on my version of itunes, when you plug an ipod in, and you then select it from the menu on the left, you get the screen with various tab-like choices on the top to manage what's on the thing ("Summary, Apps, Movies, TV.".. etc.) On the "Summary" tab, there are three areas ("ipod" "version" "options") and the third "option" is "convert higher bit rate songs to 128 kbps AAC." If you select that, it's precisely what it'll do for you when you sync. No fuss, no muss, and a full ipod.

Third, our genuine Remo is of course correct, if you want full auto, 128 kbps AAC is your only option. Typical Apple: you want it easy, it's our way or not at all. But, you can also get itunes to manually make you a copy of any track you want in any other format that itunes supports (AAC, mp3, AIFF, Apple Lossless, WAV -- basically anything but FLAC). How to do this, however, aint obvious.

The itunes "help" file explains it thusly:

To convert a song’s file format:
Choose iTunes > Preferences, click General, and click Import Settings.

In the Import Using pop-up menu, choose the format you want to convert songs to, and click OK to save the settings.

Select one or more songs in your library and choose Advanced > Create [Format] Version.

In the off chance that this made no sense at all, it kinda goes like this. Both in your "Advanced" pull-down menu and in the right click menue for any given track, you will be presented with the option to "Create [blank] Version", where [blank] is the default import setting. In other words, if your default setting is to import AIFF, and you have just ripped your entire library AIFF, this option will very helpfully (and apparently without a touch or irony) give you the opportunity to make another AIFF copy. Lovely.

BUT, and I suspect you may see where this is going, if you change your import preferences (say to whatever bit rate mp3 floats your boat), then this same right click / "advanced" option will then the present you with the ability to make a copy in whatever your new default is. You can then select your entire library (or as many or few tracks as you like) and make a copy of all of it in whatever format you want (just remember to switch your default back before ripping any more CDs, or that's what you'll get from them as well).

To sum up, the Apple way is either their way or the hard way -- but you can usually get the job done.... Personally, I like the easy way (think it's spelled l.a.z.y.), but also because I am fanatical about best possible quality on the full rig, but neither care about nor appreciate any difference once it goes on the ipod. But, if your ears and/or the gear you run the ipad through appreciate the benefit of higher bit rate lossy-ness (and I won't pretend that's a particularly difficult task) then you're stuck doing it the hard way and juggling multiple copies of each track in different formats. Enjoy, and as long as you do, you're of course doing it just right.