Flac is a compression scheme that removes the non-audio bits from a truly uncompressed audio file (like a .wav or .aif.) It is a 'lossless' format similar to Shorten (.shn) and Apple Lossless. The idea is that you get a file that is half the size of a .wav/.aif with zero audio degradation.
I hear the flac plugin for iTunes is flakey at best.
I use xAct to uncompress flac's to .aif files. Then I'll let iTunes squash them to mp3 or aac for portability. Flac to .aif or .wav = no loss in quality.