I'd go with the first option and try to look for an application that will imediately convert the tunes while burning so that your Hard Disk won't be filled with the huge (compared to .mp3) .wav files.

__________________
iMac G4 OSX 10.3.9
RAM 256MB
LW 4.10.5 Basic
ADSL anything from 3 to 8Mbps/around 1024kbps

"Raise your can of Beer on high
And seal your fate forever
Our best years have passed us by
The Golden Age Of Leather"
-Blue Öyster Cult-