Extracted from Apple's Support Page:
Clicking Erase and Sync will delete any existing content currently on your device. The content will be replaced with whatever existing content is in the current iTunes library your device is connected to. If there is no content in the iTunes library, nothing will be synced to your device, and your device will be empty.
iTunes will begin copying any purchases made with any account for which the computer is authorized.
Well, if you'd like to sync with a new computer or transfer your purchases to a computer, this is the way. And for the vague, it seems pretty clear:
Erasing and syncing replaces the contents of this iPhone with the contents of this iTunes library.
It keeps being sort of scary, though.