Circular logging is a method of conserving hard disk space in the Microsoft Exchange transactional logging process. It works by overwriting individual log files to keep the transactional log (the set of all log files) from expanding without limit on the hard disk.
When circular logging is disabled, every single log file goes into the transactional log database, and no limit exists as to how large that database can get. When circular logging is enabled, however, the transactional log can only grow to one megabyte (1 MB) in size. After that limit has been reached, the first log file is overwritten automatically to keep the transactional log database from growing any larger. The term "circular" arises from the fact that the set of log files starts to "rotate" once the disk space limit is reached, something like a LIFO (last-in, first-out) queue.
Circular logging is commonly used with Exchange native data protection, because in that mode, backups are not made so a detailed transactional log is not necessary. Circular logging is disabled by default in Exchange 2010. That's because, if circular logging has been enabled and the database becomes corrupted or otherwise compromised, it cannot be completely recovered if data has been added more recently than the time that the last full backup was created.
Circular logging is an artifact from old versions of Exchange that were released when hard disks were much smaller than they are today. Contemporary hard disks have more than enough space to run Echoing with circular logging disabled. The only reason to enable it would be when a hard disk is nearly full.