Date registered: Feb 2007
Vehicle: 2003 CLK320 Cabriolet
Location: Northern VA, USA
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The format of the music shouldn't make a difference to the integration kit. It integrates with the iPod through the standard dock connector, so as long as the iPod/iTunes can play the music it'll play through the kit.
iTunes can actually encode in several formats, the default being 128kbps AAC. I would suggest sticking with AAC as its the next generation encoding after MP3. Given the same encoding specs and file size, AAC is superior.
For most people 128kbps AAC is close enough to CD quality and they won't know the difference. If you've used MP3 before and were happy with it, 128kbps AAC will be fine. For some audiophiles, its unacceptable. It all depends on your ears and the sound system you're using.
If you have about 300 CD's, your 80GB iPod should be more than enough. I have just over 3000 songs which was about 300 CD's and it takes about 12GB, including album art. Most of my music is in MP3 from when I ripped the CD's a long time ago before iTunes and AAC.
Apple Lossless format is another option but the file size of each song will dramatically increase, but it maintains full CD quality. For better sound quality I would suggest increase your bit rate to 192 or even 256. Unless all your music is classical with really long songs, or you have tons of video you want to put on, your 80GB should be more than enough.