Step One: Settings
Make sure you've got the latest version of iTunes. We're using version 8.0.2 on Windows and OS X.
By default, iTunes likes to convert your music into AAC, not MP3, so we need to change that. In the iTunes menu, click 'Edit > Preferences' (or 'iTunes > Preferences...' on OS X) and select the General tab.
Next to where it says 'When you insert a CD', click the Import Settings button. Then, with the 'Import Using' pull-down menu, select MP3 Encoder. In the pull-down menu underneath, select Custom. Select '320 kbps' in the 'Stereo Bit Rate' menu, check the box to use variable bit-rate encoding, and select Highest from the Quality menu. Leave everything else as it is.
Click OK on all of the open windows and return to the main iTunes interface.