In addition to your files, Desktop will search your email, your chats, and even any web pages you've viewed that contain your search term. It will also organize them by category, allowing you faster access to the information you are seeking.
Desktop actually takes a complete inventory of your computer (called indexing). Because it created snapshots of your files to cache copies of them, you can sometimes retrieve an accidentally deleted document!
A word of caution: If your computer is running very slowly, don't install this gadget--it will only run slower! I also recommend only the Desktop search, not the extra Google Gadgets.
More information can be found on the Getting Started pages for Google Desktop.
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