Importing photographs into your catalog establishes a link between the catalog and the physical file. The photograph can exist on an internal or external drive. In previous versions of Lightroom, you could edit images that were contained on drives connected to Lightroom.
With Lightroom 5, Smart Previews allow you to edit images that are not physically connected to your computer. Smart Preview files are a new lightweight, smaller, file format, based on the lossy DNG file format introduced in Lightroom 4.