What does it do? Well, it helps you generate a custom palette that can be used for just about anything.
I've picked a few of my bead sets and made colour palettes with them. Now, if I want to make jewelry with these, it's easy to come up with a set of colours to work with.
You can upload just about any image you have, or with pictaculous it allows you to choose from any flickr image out there. Fun, fun, fun :-)