Yeah, iTunes needs 2000/XP, EphPod - I believe - doesn't. But to be honest, short of it being an operating system issue (like your situation), I never understood the "EphPod > iTunes" argument, or, really the argument that there was anything terribly wrong with iTunes. Maybe it's just me, but I tend to lean towards using the software that was designed specifically for the hardware in question whenever possible.
I'm sure someone will chime in with a better answer.
Anyway, AAC is probably the better format to use for any stuff you may encode in the future. It's arguably smaller than an equivalent MP3, and the audio quality really does not suffer; it's, by all accounts, better than MP3 anyway. I use 128kbps/AAC for most of my stuff, spoken word gets bumped down a notch. No, the format, like MP3 isn't lossless, but I'm also not the type to throw a fit if it isn't
perfect. I contend that if you want audio that pristine, you probably don't have an MP3/AAC/OGG/whatever player anyway.
Also make sure you have a Firewire port handy, if not that, obviously USB 2.0. The latter cable, at least as of late December when I got mine, was sold seperately.