What is the best compressed iTunes format?


First, let me state that I fully understand that an uncompressed format is far superior to a compressed on such as MP3. My current iPod is a 4GB unit, but I just had the battery replaced on my wife's old 30GB unit and plan to transfer my music that direction.

I generally use it for listening at work on Sennheiser earbud headphones that retailed for about $80 new so we're not talking HiFi. My only iPod connection currently, or planned, to my main stereo is via an Onkyo dock so I'm not getting the benefit of an external DAC so again we're not talking HiFi.

Knowing that I have somewhat limited space, what would you recommend for me to choose as the format for iTunes. I've never done anything beyond one of the lower compression MP3 options, is there something better?

Please provide a suggestion and why.

Thanks
mceljo
I managed to still have iTunes version 7 so now it's updated and I have identified the button. Thanks!
The iPod spent the night updating. Just under 26 GB to just over 4 GB. I'll check the sound quality and see how it compares and play around with creating parallel mp3 files as well.
Mezmo, great tip about converting formats, I didn't know iTunes did that. I am just about to purchase an Apple TV so I can stream Netflix, and this will probably lead to upgrading my entire library to AIFF so I can push it into my Denon 3310's Burr-Brown DACs. I doubt I will create double copies tho...I'll probably just run AIFF on my iPod and have fewer songs, at least at first... :-) All this ripping and re-ripping and converting is freakin' time consuming!
I just did a one song comparison of Apple Lossless, 128 AAC, and 192 MP3 and can't say that with my headphones that there is a significant enough difference to not just go with the AAC format that iTunes will do automatically. There is a small difference, but it's difficult to even describe so for non-critical listening on my iPod I don't think it matters.