AAC in an MP4 container (the audio codec for MP4 format audio files is MPEG-4)
the easiest way to do this is to use iTunes.
download the latest version of iTunes.
http://www.apple.com/itunes/
once installed go to Edit-preferences.
then to the "advanced" tab
then in the first tab in the window below, set your music folder (mine is f:\music)
then go to importing.
in the second drop down (import using), make sure it says AAC encoder.
in the third (settings) change to custom. select 128kbps for the bitrate - auto for the channels and sample rate. Then make sure "use variable bit rate encoding (VBR)" is ticked.
this will give you almost CD quality music.
then import your CD and it will use these settings.
edit: you no longer need to rename your files, m4a work out the box, good work fellas!
this will give you your files in format the PSP can handle, but sadly without
the right container. m4a files wont play, so those need to be renamed mp4.
the easiest way to do this is to use a batch file.
copy this into a text file and save it as rename.bat
rename *.m4a *.mp4
then put it in your music folder and double click it, all your files in that
folder will be renamed mp4 and can now be copied to your psp. sadly you will
need to do this for all your folders :(