Many possible file formats are available: WMA, AAC, AIFF, Wav all of which are apparently decent. The problem is some of these use DRM, which may affect sound quality.

Check out real player's harmny technology that allows multiple files to be played on iPod. Apple has countered by altering the DRM logic in newer versions of ipod, so that real player tunes cannot be played on IPOD, and only itunes downloaded files can be played.
I am fundamentally in favor of plain oild CDs, without DRM, becuase it think it offers the best sound quality.
-akhilesh