iTunes: How to convert a song to a different file format - http://support.apple.com/kb/HT1550 - including information about different formats and discussion about compression.
In iTunes11: File > Create New Version
In iTunes 11 "Create..." is in the File menu, not the Advanced menu.
Go into settings/general/import settings and you should be able to tell iTunes to create MP3s not AACs. Then when you try to "create new version" (iTunes 11) or "create XXX version" (iTunes pre 11) the option should be for MP3 not AAC.