Dan,
I'm not really in a position to answer Q1, Essentially you would re-rip from CD, remembering to select all the tracks on the CD and use Advanced>Join Tracks
before you import. There may well be a method of joining tracks after the fact (in fact there most certainly is if you use a third party application), but I'm not certain if it can be done with iTunes
Answer to Q2:
In the advanced Menu you will have the option to "Convert to MP3" or "Convert to AAC" (depends on whether you've changed your import settings)
This option uses the same settings as your import from CD settings, so to change it, you need to go into Edit>Preferences>Import (up to iTunes 4) or Edit>Preferences>Advanced>Import (iTunes 5 and up).
Here you can set the import format and its settings (bit rate, sample rate etc.) Whatever you set here will be reflected in the Advanced>Convert to.." menu item.
You can even use it to convert from one kind of Mp3 to another, so if you had a Stereo 160kbps file that you wanted converted to a Mono 80kbps (to reduce file-size, and for audio books you may find mono and lower bit rates acceptable (try a few test encodes and see what they sound like at differen bit-rates), then set up the import settings using the "Custom" Setting option (just remember to set it back when you next want to do music!) - Remember though that converting from a low bit rate to a higher one won't improve the quality, just increase the file size (once the data is lost it's lost).
Converting to another format in this way creates a duplicate file in your library, so if you're completely happy with your lower quality, lower bit rate file then you can delete the original, or if you don't mind using the space on your HD but want to keep the high quality file off your iPod, then simply deselect it with the small blue checkbox next to its name in the library window - now it will not be used for playbac or transfer to your iPod.
For Audiobooks you may also want to use the Options tab in the Info window to set "Remember Playback Position" so it doesn't keep returning to the beginning of the file each time, and "Skip When Shuffling" so you don't get your audio books when you're listening to music on shuffle play.
There is a way of converting to a higher quality file, while getting the benefit of the higher bit rate and that is to re-import from the original CD. When you do this, iTunes will detect that you already have the file in your library and will ask if you want to replace the original file. If you say yes, then iTunes will overwrite the original with the new format but keep your last played/rating/play count etc. info for the track.
Sorry it's quite a long-winded answer, but iTunes has hidden depths, and by George, they're well hidden , but they are also very deep!
Vince