iTunes > preferences > general. click on import settings, then import using and select AAC encoder. below, select the bit rate (e.g. iTunes plus for 256 kbps AAC).
next, highlight the lossless files in iTunes and choose create AAC version from the advanced menu.
or use this setting
alternatively, you can use this script:
Lossless to AAC Workflow v2.2
Two scripts assist with importing/managing Apple Lossless or AIFF audio files and sending converted AAC copies to a mounted iPod set to "manually manage songs and videos".
Lossless to AAC Workflow (CD->iPod):
Imports each enabled CD track as an Apple Lossless or AIFF file Makes a converted AAC copy of each imported file Adds the AAC file to iPod, deleting the original AAC from iTunes.
Lossless to AAC Workflow (iTunes->iPod):
Makes a converted AAC copy of each Apple Lossless or AIFF track selected in iTunes Adds the AAC file to iPod, deleting the original AAC from iTunes. In this way you can keep archived lossless files on your hard drive, and manageable AAC files on your iPod.
Yes, iTunes 9.1 will auto-encode tracks to iPod, but only 128 kbps AAC; these scripts enable use of your Custom AAC encoder setting.