A lossless audio format uses an algorithm to compress audio data so the original sound source is exactly preserved. This contrasts with lossy audio formats (MP3, WMA, etc.) which compress audio using various interpolation techniques -- this results in a digital audio file that isn't exactly the same of the original.
Examples of lossless formats, include:
Lossless audio files typically require more storage space than lossy encoded ones. However this type of format is often favored by users wanting to backup original audio CDs -- a perfect copy can be restored in the event of loss or damage to the CD.