Tarquinh:You don't need to create two versions if you use itunes. According to itunes help: Managing space on an iPod shuffle or Motorola phone featuring iTunes
"Connect the device to your computer.
When the device appears in the iTunes window,
select it, click Settings, and then do one or more of the following:
þ To maximize the number of songs that fit on the
device, select "Convert higher bit rate songs to 128 Kbps AAC."
þ To control how much space is reserved for music,
drag the slider to the left or right. This won't affect files already stored on
the device."
Correct, but that sadly only works for the Shuffle. Still waiting for Apple to make that work for all iPods, which would be a major plus for me. In the meantime, somebody did some Applescripts to do it (though guess it'll be reeeaaallll slow), they're referred to somewhere on here.
Otherwise it is all possible, though there are different ways to do it - many threads on the subject here depending on how you want to run it, searching for 'apple lossless' or 'itunes library' would be a good place to start.