It moves all your music into the iTunes Music folder but it doesn't save the original file's place, it literally moves those files into new folders, so when it says it can't be undone, it won't be able to put the files back in the "original" place you had it, but the files will be unharmed.
Although the default spot is your Music folder, it technically moves all your music files to whichever location is selected in the Preferences. As the pretty and heroic rockthecasbah said, it moves the files rather than copying. As such, selecting a new location in the Preferences before consolidating the library is a pretty clean way of transferring a library.
You're right, I was incorrect. It's been a while since i've had to consolidate a library, I keep mine quite organized .
Straight from the horses mouth:
"Consolidate your music library
In Windows, when the iTunes Setup Assistant locates a music file or when you drag a music file into iTunes, a link is made to that files location on your hard disk. To keep all your music in a single location on your hard disk, open the Advanced menu and choose Consolidate Library. These files are copied and placed in your iTunes Music folder. With all your music in one place, you can more easily copy it to another Windows PC or Mac or back up your music library to an external hard disk or other media."