Does AAC Encoder apply when importing or when transfering to iPod?

Question

I have iTunes set to import using AAC Encoder. CD songs in the iTunes libary on my PC are m4a fles, while downloaded mp3 files remain as mp3 files.
Are the mp3 songs converted to AAC when transferred onto my iPod? Or does the AAC Encoder only apply when importing into the libary on my PC, in which case why do mp3 files stay as mp3 files?
Reason for asking is concern that converting from mp3 to AAC reduces sound quality.
iPod   Other OS   60GB Video

Answer 1

Graham,
The import setting you select in your iTunes Preferences applies specifically to songs you add directly from a CD.
It does not affect songs that are added to your library that are already mp3's (or any other format for that matter).
Have a look at: http://docs.info.apple.com/article.html?artnum=301509
When you synch the files to your iPod they will remain whatever they are in iTunes - nothing changes in the transfer.
iTunes can convert files (see http://docs.info.apple.com/article.html?artnum=93123 if you're interested in details on that) but you are right, there is a loss of audio fidelity.