Hey, hope I can help you out this time!
Ther is some good stuff in the manual about this but here is more.
Disk means that the clip will stream from your hard drive whenever you play it. This takes time and resources. In extreme situations (end of the evening usually) this can be a bad place to be as with big clips you can hear the external drive (in my case) chuntering away, hear the struggle almost to get the clip off drive, de-compressed, into M8 and played. If it gets to this stage your system will drop frames i.e. the clip will play but jump as it misses out lots of information.
For big clips though there may not be another option. And this is the decision you/we are always making - how and where to compromise?
That is the answer to the second part of your question really - how you choose to compromise from the moment of editing, exporting etc onwards is THE thing that will set the quality and performance of your clips and your set within M8 or any software. Try different sizes, qualities and compression to find a good place to be for your clips, system & you.
With lots of media in a set some of your unused clips, possibly the bigger ones in my experience, may get a 'red blob' on them as the system swops them out to make space/resources available for the primary clips in action at the time. If you suddenly call on a layer to play which contains a swopped out (red blobbed) clip there will be a very noticeable lag whilst it is 'loaded' - a drag all round. You can prepare for this by re-triggering that clip just before it is needed.
Compressed seems to be a half-way house, the clip has been read from disk & held somewhere (don't ask!) ready to play. This means that a clip is ready to decompress & play pretty much straight away and will generally play more easily and smoothly than streaming from disk.
It is a good compromise for clips you want to be available & look good no matter what.
Uncompressed means the clip is pre-read from disk, uncompressed and stored in your computers memory ready to play smoothly and speedily at the drop of a hat.
The more memory your computer has the more clips you can do this with.
It is only really suitable for lots of/or some small clips.
Obviously big clips will just not actually fit in memory. Watch out selecting this option with too big a clip as it will slow everything down trying to do what you asked - the impossible - and probably leave that layer dead in the water with nothing in it!
Analogy time -
News reader & autocue = Uncompressed - words go straight from eye to mouth with no brain processing - smooth comprehensible playback.
News reader & piece of paper = Disk - words go eye, brain, processing and then mouth - you will get the gist of it but under pressure playback may well be stuttery!
Hope that helped. I'm sure there is a much more technical explanation but this reflects the reality pretty well.
regards