FLAC stands for Free Lossless Audio Codec, and is simply another encoding scheme or "container" for music files. FLAC, by definition is lossless (i.e.: none of the source material is discarded in the encoding), while mp3 is lossy (bits of source information are discarded for the sake of compact file size). Theoretically, if you rip a CD to FLAC, you can use that FLAC file to burn a new CD, with no measurable difference in quality.
FLAC does have different levels of encoding, however these levels have to do with compression (again, for the sake of file size). All levels are still lossless, the only difference being a highly compressed file (smallest file size) puts more load on the CPU to decompress (or decode) than a lower compressed file. There is also an option for no compression whatsoever (largest file size), which puts virtually no load on the CPU (advantages are power savings, and less potential for any errors in decoding, which could result in increased noise, but not likely discernable).