So you are looking to reduce the quality of existing WMA and MP3's to reduce the size when you send them to your ipod?
DBpoweramp isn't free but will convert for you
Foobar2000 is free and will do the compression
Also if you use anapod from redchairsoftware you can set it up to reduce the bitrate automatically when you transfer the music to the ipod. Plus the software is way better than itunes.
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