I'd avoid using the ATRAC format as it restricts future use on none compatible systems and would say the same for FLAC. I'm all for using formats that are generally accepted. Having sat archiving multiple recordings into MP3/WMA I wouldn't want to do it again so am glad I opted for a common system.
As far as sound quality, if you're not a HIFI connoisseur then you needn't worry about the CD vs MP3 arguement. Yes it is not as good, often clearly not as good as you lose a lot of depth. However for the average joe, this is not important and hence the success of iPod's etc. For myself I use MP3's in my car stereo and am more than happy, it allows me to take my music with me and gives an endless jukebox facility when listening on my pc.
People who demand quality reproduction will not accept the claims of an MP3 file (or similar) being anything near as good as a cd (or for that matter an LP). But at least the CD had the benefit of no clicks and hiss, where as MP3's don't offer an audio benefit, only one of convenience.
I would say that if you're after a clear, warm sound go for WAV files which take up the most space but offer the closest you will get to CD quality. As USB hard drives of 750Gb are now only around £60 this makes storage less of an issue that it was say 12 months ago. As a compromise, something like Apple's Lossless format or at the very least, a high bit rate MP3 such as 256 or 320 Kbps.