It consists of an inherently lossy encoding in the frequency domain (like MP3) plus an encoding of the difference between the lossily encoded audio and the original.
While a few other lossless formats do this (mostly for backward-compatibility), FLAC does not convert the audio into the frequency domain. It either uses a polynomial or linear function: http://xiph.org/flac/documentation_format_overview.html
Counting in binary is just like counting in decimal -- if you are all thumbs. -- Glaser and Way