Need help please - not understanding Libraries, etc.

I need to find someone who can help me out because I can’t for the life of me find a customer support phone number for ipod help (imagine that!). Anyway, my hubby got me this great ipod for Christmas, the big one that holds everything. I have finally gotten good at bringing 10-15 cds into work with me everyday and downloading them on my ipod while I work. This has been going great, as I have about 600 cds I want to get downloaded so I can get rid of all the cds. Well, last week, my computer was running really slow and I noticed that there was a “My Music” file in my documents folder and it was HUGE! Every time I was downloading something to my ipod, it was also copying it there. So, I deleted that Music folder from my computer, as I didn’t want to get in trouble here at work for having it on there. When I did that, I apparently deleted the files that my ipod Library reads from. Now, I know this isn’t a huge deal if I had copied everything over to my ipod Music file, out of the library music file. But, there were a few songs I had not copied over, a few I had bought, so I guess now they are lost forever? Also, why can’t my ipod music file serve as the library as well and why can I not use any computer to so this? I can’t store music files of this size on any computer anywhere, work or home, so what am I to do?

The concept of the iPod is a mobile version of your iTunes library - which is stored on your computer. So when you import CDs you are importing them to your computer, as you discovered, in your My Documents/My Music/iTunes/iTunes Music directory. By default, when you attach your iPod, iTunes syncs your iPod to the contents of the library you created on your PC. There are options which control the compression ratio of the songs which controls the overall size of the library (and the sound quality of the songs).
If you are concerned about storing your library on your work PC it would be better to use your own PC at home. If you don't have room for your entire library, you can either buy an inexpensive external hard drive, or select the "Manage contents manually" iPod preference so that you can delete your files once they're on the iPod. But this is dangerous if you don't keep a copy of your library burned to a CD, because (again, by default) music is copied only from iTunes to your iPod, not from the iPod back iTunes. There is software you can buy to do this, but that's another topic. If you delete your library then reconnect your iPod, the contents of the iPod are lost because iTunes is syncronizing the iPod to itself.
I can't answer your question about purchased music, because I only use my own CDs (purchased music is too compressed for my taste).
Since you haven't gone too far in creating your library, I would start over, at home. Import everything, add your album artwork, adjust all the information (like genres) to your liking, then backup your library to DVD or CD. An easy way to do this is to create a playlist and drag all your music into it, then select "burn playlist to disc" and follow the instructions.
Another good thing to do (before you start) is go to the "Importing" preferences and select the default bitrate iTunes will use. 128Kbps is the default, which is the highest compression (and lowest quality). Try a few other bitrates (importing the same song, preferably of acoustic instruments, over and over) and see what bitrate you like. To some, 128 is good enough. IMO, 224 is a good compromise. The average compression rate is about 8:1 and it sounds good (to me, anyway)...

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