The recording format VinylStudio uses is set in the Recording Options dialog under the Options menu. We generally recommend recording to an uncompressed format (WAV or AIFF, plus CAF on the Mac) as this provides the best audio fidelity and makes VinylStudio run faster. You can also record to a lossless compressed format (FLAC or Apple Lossless) and cut your disk space requirements by about 40% with no significant downside, especially on a fast machine.
If you are short of disk space however, you might like to record to a lossy compressed format, i.e. MP3, OGG or AAC. This uses much less disk space - about 75MB per album rather than 500 - but there is a slight loss of sound quality. All VinylStudio functions are available on all types of file, and there are also facilities to convert from one format to the other. To help you decide, you might like to make a couple of test recordings and compare them on headphones.
If you plan to cleanup your recordings, the audio cleanup tools work slightly less well when recording to a lossy compressed format. Also, if you edit such a file outside VinylStudio, you will need to transcode it which will cost you some quality.
Please note that the format you save your tracks in need not be (and usually isn't) the same as the format used to make your recordings.