The
best way if you're an anal retentive audiophile is to use
Exact Audio Copy for ripping and
LAME for encoding. Configuring these properly can take some patience and a degree of technical expertise not possessed by the average computer user, though.
Personally, I just use iTunes. I think I've set it to encode at Variable Bit Rate targetted for 192 kbps, highest quality, and regular stereo (not joint stereo). Also be sure to check the error correction box; ripping will take slightly longer, but it will help to make sure you get fewer pops, hisses, or other ripping errors. I've got a set of fairly high-end headphones, and when I use those options for ripping my iPod sounds great.