Lossless format files are preferred. wma’s or m4a’s are lossless (meaning they do not cut off any frequencies to compress the files). FLAC and MPEG-4 are also lossless. High bitrate mp3’s or variable bitrate mp3’s are good if you want good sound but aren’t terribly worried about loosing any frequencies. Really though, I don’t think there’s much of a reason to keep using mp3’s anymore now that storage has become so cheap it’s not as important to compress audio so much.
You might like to check out this article on audio compression:
http://en.wikipedia.org/wiki/Audio_compression_(data)
You’ll have to copy and paste the link due to Fluther’s formatting