In the Import Settings window, there are two drop-down menus that allow you to choose the two key factors that determine the kind of files you'll get when ripping CDs or converting digital audio files: file type and quality.
You'll choose what kind of audio file is created--MP3, AAC, WAV, or others--in the Import Using menu. Click it and make a selection (for tips, check out AAC vs. MP3: Which to Choose for Ripping CDs).
When you've made that choice, you next need to decide what quality you want the file to have. The higher quality the file, the better it will sound, but the more space it will take up on your computer or device. Lower quality settings result in smaller files that sound worse.
Click the Setting menu and choose from High Quality (128 kbps), iTunes Plus (256 kbps), Spoken Podcast (64 kbps), or create your own custom settings.
When you've made your changes, click OK to save your new settings. Now, the next time to go to rip a CD (or convert an existing music file on your computer), it will be converted using these new settings.