See the bottom of this post for appropriate links for programs.

First and foremost
Sound is subjective, even more so than any other sense. The problem occurs when you can ?see? what you?re hearing, which introduces bias. Take this information with a grain of salt; I believe the best option is always what suits you the best.

Bias
Before you even hear sound, you have an idea of how it is going to sound. You generally know which format will sound better from what the respective companies that endorse it say about it. This situation can be dispersed when using blind listening tests. I used a program called Waverate for testing. It has automatic randomising, so even if you wanted to cheat, and give a particular formate/bitrate a higher score, it is impossible. More on the test later.

Ripping
Ripping is the process of transferring the songs from a CD to your computer. An appropriate program then encodes these files to make them much smaller. You can select the bitrate in which you encode these files to, the higher the better. You can encode into several formats, each attempting to claim domination of the market. Some popular ones are MP3, WMA and AAC. Recommended programs are Exact Audio Copy, Windows Media Player and iTunes.

For each file format, there are many encoders that are avaliable to use. For AAC, the best is iTunes (http://audio.ciara.us/test/aac128test/results.html). For MP3, the best is LAME. (http://ff123.net/cbr128.html). For WMA, the best is inevitably Windows Media Player. (http://www.microsoft.com/windows/windowsmedia/download/default.asp)

Downloading
Recently, the option of downloading songs has become avaliable. This is not new, and stems back back to the hugely popular Napster days. The recent move to make downloading files legal (and hence have a fee) has been taken well by the market. The main player in this push is iTunes and its music store, but soon every company and his dog will have a store. Many of the Windows orientated music stores use WMA, which is not compatible with the iPod, so they are almost ruled straight out.

As for the quality, the iTunes store offers 128kbps songs for 99 cents, and while these aren't CD quality, many people can't tell the difference between them. There have been some interesting developments (http://www.ipodlounge.com/forums/showthread.php?s=&threadid=13364) (yet unfounded as of now) that say the songs iTunes have are actually encoded from master recordings. This means that get a better sample of the song (think of taking a glass of water from a large pool (master recording), or taking a glass from a smaller pool (CD) and you'll start to understand). When this is all said and done, from a CD you can rip to whatever quality you want, and have a physical medium onto which your songs are on, which is something that has slowly been dieing since the LP days.

AAC vs. MP3
No doubt there are a lot of people who want to now make their collection primarily AAC, with the release of the iPod and now iTunes. Go for you life, just don't be absorbed too much by the marketing, despite AAC using MPEG4 compression techniques, it does not sound significantly better (to me at least). Next, regardless of what you may have heard, 128kbps AAC is about the same size as 128kbps MP3 (not exactly as AAC is VBR by its very nature).

There are several settings for ripping.

Bitrate: Higher the better as previously mentioned. 192kbps is a common middle ground that has the benefit of not being too large in file size, but still being very comparable to CD?s in quality.

Stereo/Joint stereo: Joint stereo duplicates information from one channel to the other, but only if they have the same information at any one given time. This is a space saving feature, and if space is everything then enable it, otherwise go with plain old stereo, I personally prefer plain old stereo.

CBR/VBR/ABR:
To find out more information on CBR/VBR, then go here. (http://www.hydrogenaudio.org/index.php?showtopic=12974&hl=vbr,and,cbr)

Sampling Rate: This is the amount of times a ?sample? of the sound wave is taken per second. Anything lower than 44.1KHz will reduce quality, while anything above 44.1KHz will have zero effect when ripping from a CD. You can?t get something from nothing.

Which brings me onto the next topic.

Converting
Most of you would have a large music collection, probably encoded in MP3. With the release of iTunes, and AAC support, many people would like to convert their collection to AAC. I cannot oppose this action enough.

An analogy. There are two glasses. One has water, the other doesn?t. You pour all the water into the other glass. You have just converted from MP3 to AAC.

Now, there will not be more water, that is a known fact (disregarding humidity?.). There is a very large chance; almost certain, that there will in fact be less water. Some water may have been spilled in the process, or some remains in the other glass.

Back to real life. When you convert from MP3 to AAC, you cannot gain information, regardless of the destination bitrate. This would dispute the laws of physics that have been established centuries ago. Now, for the sound of it. To most, its will sound the same if converted to the same bitrate, that?s fine. To some, it will sound worse, that?s also fine. But, to some it will sound better. This thought is purely manufactured. Converting it may result in certain frequencies being more pronounced that the original sound. Now whether you want your music to sound different to what it sounded like on CD is up to you, but I know I want it to sound exactly the same.

If you really want to convert from MP3 to AAC, selecting a higher destination bitrate will get you nowhere. If you select the same bitrate, you will get exactly the same file size. If you do not, then it is due to the program reducing quality ever further. If you select a smaller bitrate, you will reduce the file size, but you will reduce quality. Once again, its up to your ears to judge if this is noticeable.

This holds true for converting from any compressed format to and other compressed format, for example AAC > MP3, MP3 > WMA, WMA > MP3, etc. Also, when you convert to a lower bitrate (downsampling?), then the quality will be less than the same bitrate that has been ripped from the CD. This will probably be noticeable to about 0.1% of the population, so don't worry yourself too much about it all.

One thing that the other Adam mentioned (not me :P, is that by converting their collection they mean re-ripping their collection, and thats fine by me)

Tagging, yeah, I know him
MP3 is a mature format, AAC is a relative newcomer. MP3 does not have a standard tagging system, neither does AAC. MP3 however, has been around for a while, and the tagging system it uses is ID3 v1/2. This is the standard and is supported by every program and MP3 player under the sun. AAC has a standard tagging format, and iTunes uses this, but other programs do not. Winamp, which is by far the most popular MP3 player (software) in the world uses a different tagging format. Other programs use their own format, so AAC tagging should be limited to iTunes use to ensure compatibility.

Listening tests
Firstly, the equipment.
A PC, Creative Audigy soundcard. CPU has no problem decoding sound.
I have a sound running through a Logitech Z-560 set. Yes, they are comparatively poor for music compared to ?audiophile? speakers, but they do provide a good indication of what the average joe has. I will be upgrading these to a very tasty pair bookshelf speakers which cost a bomb, but are the best I have ever heard bar none. An update of the listening test will be provided when I upgrade.

MP3?s were encoded at 128, 192, and 320, using EAC and LAME 3.93.1
WMA?s were encoded at 64 and 128, using Windows Media Player
AAC was done in 64, 128 and 192, using Nero 6's AAC encoder (iTunes wasn't out yet, I will re-rip eventually)
These were compared to an uncompressed WAV file.
They all had CBR and Stereo settings.

The test set was converted to WAV (required for the test) all at the same time using foobar. The song was H, by Tool. To get a sample of it, go here (http://www.toolband.com/album/index.html) and then click on the middle album and click on ?h?. Results may vary if you listen to different music, so yet again take it with a grain of salt. The program has a built in commenting system, which I used.

Results (out of five)

0 WAV ? original
1 128 MP3 4.3 ?slight crackle?
2 192 MP3 4.4 ?pretty good?
3 320 MP3 4.5 ?probably best?
4 64 WMA 3.0 ?crackle?
5 128 WMA 4.3 ?yeah?
6 64 AAC 2.7 ?distortion? (encoded in Nero, not as good as iTunes)
7 128 AAC 3.9 ?meh? (encoded in Nero, not as good as iTunes)
8 192 AAC 4.4 ?nice? (encoded in Nero, not as good as iTunes)

Just ignore the higher bitrate?s for comparisons, they don?t mean much. I was quite intrigued at the results at 128. WMA picked up 4.3, MP3 got the same, but AAC just 3.9. Moving right on to 192, my preferred bitrate, MP3 got 4.4, tied exactly to AAC. I did not hear any difference what so ever. Of course 320 MP3 took the title, but there was very little, or no difference to 192 MP3/AAC, while being 167% larger. No thankyou. I also tested 64 MP3 at a different time, and it was really bad. I promptly gave it my wooden spoon, with a score of 2.4, while AAC and WMA faired better at 2.7 and 3.0 respectively.

Conclusion
Well, you got this far, thanks.
I will update my listening tests in a couple of months, and there will be a more accurate rating of different file types/bitrates. I hope you learnt something from this. From my research and listening, I recommend 192kbps MP3 or AAC. They are a nice size and have some good quality. Just be aware that AAC it is a fairly new format, and doesn?t have wide industry support ? yet.

Links
LAME - http://lame.sourceforge.net/
iTunes - http://www.apple.com/itunes/
AAC - http://www.apple.com/mpeg4/aac/ (marketing, don?t believe it all)
ID3 tagging - http://www.id3.org/
Waverate - http://www.audiocoding.com/tests.php
Exact Audio Copy - http://www.exactaudiocopy.de/

Sorry for the length, but feel free to PM me, and I will amend any information if you put forward a good enough point.