Hah! As a 40D owner I can actually answer this one with no uncertainty.
This controls the interaction of two controllers on many Canon dSLR cameras: there is a dial with a button on the rear face, and there is a dial that's directly under your forefinger by the shutter button.
Now, you use either dial along with the various buttons on top to change drive mode, autofocus mode, ISO, etc… You can also use either the rear dial, forefinger dial, or joystick to navigate the on-LCD menus (though you can only format the card by using the rear dial's button, not the joystick button). None of that changes with On vs. _/.
What does change is shot control, i.e., what happens the rest of the time when composing a shot.
When in "on" the back dial does nothing. You can set shutter speed for Tv (shutter priority) & M (manual) modes, or aperture for Av (aperture priority) mode, with the forefinger dial. You cannot set aperture for M mode.
When in "_/" the back dial does aperture in M mode, and exposure compensation in Av, Tv, or P (program) mode.
In either setting, the forefinger dial allows selecting different equivalent exposure combinations of shutter and aperture in P mode.
There may be an obscure use I'm forgetting, but these are the most obvious. Some models of camera have instead of Off-On-_/ two different switches, one for power and one to lock the rear dial.
I've never had a need to lock out the rear dial; I generally just use _/ mode whether I'm shooting manually or not.