My family just bought a new iMac that we plan to use as a media center computer. iTunes works fine, and we use three iPods in my family, so we are definitely going to stay in the Apple ecosystem.

However, I am unsure of what format I should rip all of our CDs to.
I have a lot of tracks purchased from iTunes (which I stripped the DRM from), some iTunes Plus tracks (and other unprotected downloads), and a lot of CDs. Because I am obsessed with audio quality, I want the highest possible quality.

I was at first going to do 256 Kbps MP3 VBR, but I then realized that MP3 was a lossy format and I could not go back to the lossless version.
Another option would be Apple Lossless which has positively huge files (35 MB per song) and would quickly fill up my 8 GB iPod.

Will the VBR MP3 be good enough, or should I stay on the safe side and go with Apple Lossless?

I also realized that since this computer will have space to burn (750 GB), I could keep Apple Lossless versions of the tracks on the computer, and duplicate them to 128 Kbps AAC specifically for the iPod. But this would use up even more space than just the lossless files.

I know, this is confusing.

(I also hope that I didn't bore you to tears with my technical mumbo-jumbo.)