Well, basically its a way to have another version of Android on your phone and its goodies. So say you have a nexus one but really like HTC's sense, you can get a custom android version that has sense on it. Stuff like that (I believe).
Sometimes custom ROMs will give you updates your carriers aren't pushing out, and features they hid. So you bet your ass that when FroYo drops, you can grab it for your Evo, complete with the free tethering feature Sprint will likely disable.