What is the best compressed iTunes format?

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).

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.