FLAC refers to an open-source audio format that stands for Free Lossless Audio Codec, meaning free lossless audio compression.
A Flac file is an audio file that has been compressed using the FLAC method. Much like the MP3 format, audio data is compressed. However, unlike MP3, the FLAC method compresses without loss and is therefore especially recommended for audiophiles and sound processing. While the MP3 format is limited to 48KHz / 16Bit, Flac can also encode 96KHz / 24Bit.
For most systems, there are playback, RIP & conversion programs that control FLAC. In addition, there is now also a whole range of devices that FLAC can play. More information can be found here: http://flac.Sourceforge.Net/links.Html#hardware. Meanwhile, there are certainly more than the devices listed there. Some programs need a plugin to handle FLAC.
Winamp is especially recommended for Windows because it can play and create FLAC.