The main thing it does is free up disk space by moving fonts, ringtones, and applications to a different partition on the phone. Depending on your firmware, your phone only has so much space for installing applications - 1.1.4 only allots 300 MB.
If you install a lot of applications, this gets eaten up quick (you'll see disk space warnings when you get close). This program will move files to the other partition allowing you to continue downloading additional applications.
I'll be honest, I tried it on 1.1.4 and my phone locked up after using it, causing me to restore. I haven't tried it again since, though I know people on here have had no problems with it.