What is the best compressed iTunes format?

Apple AAC and apple lossless both use mpeg4 compression, apple lossless is simply compressed at a MUCH higher bit rate, and its variable compression. If you get into the specs, apple lossless has a bit rate of anywhere from 600kbps to 1100kbps, + or -, depending upon the track. AAC only goes up to 320kbps. AIFF is ripped at 1411kbps, which tells me that its a more true lossless format than apple lossless. I don't have any WAV files.
Your optical drive and the ripping software you use matters more than which file format you pick (AIFF, WAV, FLAC, etc.) when talking about bit-perfect rips.
I have Audio Tecnica earbuds, which are OK, not great, and I can hear the difference between a 320kbps rip into .mp3/AAC, and a 1411kbps rip into AIFF. More frequency extension and detail. I only rip AIFF and apple lossless, I avoid the lossy formats. Can I hear the difference between AIFF and apple lossless? Not really, not with the earbuds. If I went from my laptop through a DAC into my system, maybe. I recommend apple lossless, its a great middle ground. I don't want to listen to my favorite music at work knowing that I am missing something in the sound because the file format is clipping the waveform.

With an ALAC file...(Apple Lossless), you can reconstruct a bit-accurate copy of the original file.
Than the conversation turns to the speed / accuracy of the reconstructing computer.

The quoted bitrate (above) would seem pretty spot on. Very complex music will run 1000+ while music of low complexity dips below 600, but rarely.
Check out a copy of a CD in ITunes to get the idea. Part of the listing for a sony recorded in ALAC is its bitrate.

"I always set the synching preferences to automatically convert to AAC (the compression/trimming ratio from AIFF to AAC is about 10:1)." - Mezmo

How do I do this? I can't seem to figure out where or how to adjust the settings. I'm ripping everying thing in Apple Lossless and already have more than my iPod can handle.

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).