The latest installs I have seen use AAC at 256 kbit/s as the default.
You could transcode from MP3 but I suspect you'd lose even more data going from one lossy format to another. You can highlight all your music and select CREATE AAC VERSION.
I very much encourage you to use Apple lossless of you're married to ITunes and an Ipod, or better yet .flac and another player and use kernel mode drivers on the PC.
Disk is pretty cheap and on even an 8GB ITouch you'll get twenty CD's.
Why though data out? I've been digitizing my CD's since the Rio PMP300 and have repeatedly had to re-rip everything as technology improved, start out right.
If you absotively posolutely want lossy compression, I'd use EAC, rip to MP3 via the LAME encoder at the maximum bit rate you can tolerate and import into ITunes.