OK, here's the pieces I can answer.
There are converters that will take non-protected .AAC input files and export to .MP3 files. With iTunes 7, you can convert unprotected .AAC files to .MP3 files right from the library, its only dependent on your iTunes "Importing" preferences (Edit -> Preferences... -> Advanced -> Importing -> Import Using). No CD burning required except to de-protect the protected .AAC files, which isn't a problem for you.
One reason I keep my .MP3 files separately is it allows me to easily import them to other players, in my case that would be my old Rio. I can use the Rio software for this or Real player or even Windows Media Player. The beauty of .MP3 files is they play on any player (iPod, iPaq, Rio, iRiver) or any software (iTunes, Real player, Windows Media Player). I manage it all from iTunes, then rescan periodically from the other programs. The downside, if there is one, is that you have to rip .MP3 files at 160 kbps to get the same sound quality as 128 kbps .AAC files.
John