Are you using iTunes to get the tracks from the CDs to the iPod?
If so, in the iTunes preferences, under "Importing" you can set the format, bitrate, etc.:
"Import using..." - this allows you to set the encoder, which leads to the file type (mp3, AAC, wav, aiff, Apple Losssless)
"Setting..." - choose "Custom" -- another window will open allowing you to set things like bitrate, etc. - the options will depend on the enoder you choose (e.g with mp3 you can set bitrate, variable, quality, sample rate, channels, stereo mode, smart encoding, and filtering low frequencies -- with AAC you can only set bitrate, sample rate and channels)
Basically, the lower the bitrate, sample rate, etc. the smaller the file. However, it also means less quality, and the potential for some of the high end or low end content to be lost, since the small file is acheived by compressing the data.
I've been told by Centerpointe to use .wav or .aiff to ensure that I don't lose anything - these are uncompressed formats, therefore full quality, and large size.
For the paraliminals, I've chosen mp3 with the following settings:
Stereo bit rate = 320kbps
Use Variable Bit Rate Encoding (Yes)
Quality = Highest
Sample Rate = 44.100 kHz
Channels = Stereo
Stereo Mode = Normal (this one is really important!! don't do "joint stereo")
Smart Encoding Adjustments (no)
Filter Frequencies Below 10 Hz (no)
I can't say that's the optimal setting, but it seems to be working for me. You might be able to set the bitrate and sample rate lower and get smaller files without losing quality, but I chose to set both high just to be sure.
Also, these instructions are based on iTunes on a Mac. I don't have access to a Windows machine, so I can't tell you if it is exactly the same there - but it should be similar.