FLAC is excellent. It provides lossless compressed versions of uncompressed WAV files (e.g. from a CD), allowing you to reproduce bit-perfect copies of the original CD WAV file when you play the FLAC file back. Think of it as being like zip/rar compression, but optimised for audio files. It's what I use for my CD archive (ripped using EAC, checked with Accurate Rip, and with a log file and a cue file), with a LAME -V2 MP3 copy for portable or low bandwidth playing.
However, if your files were originally in ATRAC (or any other compressed format) then FLAC is a bit pointless, because there is no point keeping a lossless copy of an originally lossy file - and in any event it doesn't meet your size constraints, as the FLAC file would be bigger than the original ATRAC file! If I were you I'd keep the ATRAC files anyway, if only because they are the closest you have to an original, and maybe one day XBMC might also play them (although I doubt it, because last time I looked there was no working open source ATRAC decoder).
If you want to check out a specialist AV forum, IMHO Hydrogen Audio is head and shoulders above the rest. It provides impartial, scientific, factual, evidence based advice, and is ruthless about expunging audiophile nonsense and presenting only testable and tested information.
This post has been edited by Heimdall: Jun 15 2011, 05:07 PM