Flac levels go from 0 to 8. No matter what you are dealing with a "compressed" lossless file. IE if you want 100% uncompressed, you make a binary image of the CD itself, but that is good for jack $#17. Nothing can really play a binary cd image and there is tons of junk in the cd image you dont need anyways, like track info, song length, etc. That stuff doesnt need to be lossless.
Each flac level will take the actual audio portion and rearrange the 1's and 0's that describe the sound in a different way, optimizing every way they can. The extreme compression will take an extremely long time to optimize the file, but rather than having, say, a 700mb total CD being flac'd into a 650mb cd, you'll have it shoved into the space of 400 or 500 mb. The less extreme flac levels will basically sacrifice optimization and analysis for the sake of speed, and just get that cd into the right format and call it a day.
Refer to http://flac.sourceforge.net/faq.html#general__lowest_bitrate
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With FLAC you do not specify a bitrate like with some lossy codecs. It's more like specifying a quality with Vorbis or MPC, except with FLAC the quality is always "lossless" and the resulting bitrate is roughly proportional to the amount of information in the original signal. You cannot control the bitrate much and the result can be from around 100% of the input rate (if you are encoding noise), down to almost 0 (encoding silence).
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It's hard to explain without going into the codec design, but to oversimplify, the encoder is looking for functions that approximate the signal. Higher settings make the encoder search more to find better approximations. The functions are themselves encoded in the FLAC file. Decoding only requires computing the one chosen function, and the complexity of the function is very stable. This is by design, to make decoding easier, and is one of the things that makes FLAC easy to implement in hardware.
That should clarify things for you plenty. now go flac yourself. :)
