2,900 songs, 23GB?? false advertising, or I'm doing something wrong here...

Complete novice here. Just bought Ipod touch 16gb then upgraded to the 32 GB because I got about halfway through loading my CDs into iTunes when I noticed the GB showing in iTunes was exceeding the 16 GB Ipod... 16gb was advertised to hold ~3,500 songs along with hours and hours of video. So now I am up to 2,900 songs and it's 23GB - there's got to be something wrong here. If I go further, I won't be able to fit onto the new 32GB, nevermind even being able to put video, etc on it!! Talked to a guy at Best Buy and he was perplexed and felt that 2,000 songs should only be about 8GB..
From spending hours on these boards looking for info, it appears that my import settings that were the default in iTunes (that I downloaded on 3/26/09) of AAC format and iTunes Plus, results in large file sizes....
I have literally spent DAYS importing CDs and really don't want to redo it under different import settings... I noticed when I right click on my Itunes music folder>properties>general tab > click on advanced attributes, there is a checkbox that I can compress contents to save disk space.
So question is
1. is the above method appropriate to compress the files
2. is there an easier way to 'convert' all my imported music (currently showing as MP4) to MP3 that would be smaller file size (if so, is there a downside to doing this?)
3. could there be other reasons for this large file size or other ideas/suggestions??
Thanks in advance!
Tara

Hey, now. This line scares me:
"I guess I'll learn more over time about what material I want to carry around with me on the iPod vs. keeping stuff on the computer as I get used to it!"
You should always keep it on the computer. If the only copy of a song is on your iPod, you are setting yourself up for a minor disaster. Sooner or later you will need to restore the iPod. There are any number of issues that can cause it to get wonky and unusable. When that happens, the troubleshooting always has the step "restore your iPod" somewhere in the order of repair.
When you reach that step, *everything on the iPod is erased*. If you only had content on the iPod, not on your computer (or at least on a backup) you will lose the content. Period. No chance to recover it.
Please, if you insist on deleting from the computer, ensure you backup. Heck, backup anyhow. It just makes good sense.

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