Flac (Free lossless audio codec) is a lossless audio codec much like the Wav format is. Only unlike Wav, Flac can compress music like Mp3 does. However, unlike Mp3, Flac compresses music losslessly. If you rip a CD into the Flac format, The Smaller Flac Files will retain all of the 1's and 0's from the CD. (Aka.. The Flac files will truly sound 1 to 1 when compared to the CD.)
The Mp3 format, and other lossy audio formats, like the AAC format which i Tunes uses for example, throw out digital information from the CD in order to make for smaller file sizes. This is why a Mp3 of a song, will be about 1/2 the size of a Flac file. Even a maximum quality Mp3 file, which would sport a 320kbps bit rate, would be technically inferior to a Flac file.
Audiophiles tend to only use the Flac format, and other lossless audio codecs, do to the fact that all lossless audio codecs will always sound truly 1 to 1 with the original source format. (Like a CD)
Flac = 1 to 1 carbon copy of the CD original. No digital information is lost from the CD.
Some other lossless audio formats include, Wma Lossless, and Monkeys Audio. (All lossless formats sound 100% identical to each other in quality.)
Mp3 = A less then perfect copy of a CD. Some digital information is lost from the CD.
Note: 99% of most people, can not detect a loss in sound quality with the Mp3 format at bit rates above 192kbps. The Mp3 audio codec is designed to throw out only the sounds it thinks people won't be able to hear from the CD. (Works by the formula of perceptual hearing)