What does this do?

I'm not sure what you are talking about, exactly.

If you are referring to the hole under the nut in the headstock, it's the truss rod that adjusts the bow of the neck for sting height.

Forgive me if that isn't what you are talking about.

I think that this may help:
http://www.warmoth.com/guitar/necks/necks.cfm?fuseaction=truss_rods

I do think it was the truss rod I was reffering too...

dont mess withthat.
truss rod adjustment is dicey stuff.
you can turn and turn and not sense any movement...then all of a sudden wham!.

dont mess with it.

From the site Greybeard gave, I dont think I will

I wouldn't say don't mess with it. But I would say don't mess with it until you understand what it does. And it is very simple really.

When you turn a truss rod clockwise it tightens the truss rod. This stretches your neck out straight. It forces the headstock down. If you really tighten it too much, your neck exaggerated will look like a frown. :(

When you turn a truss rod counter-clockwise it loosens the truss rod. This relaxes the neck and allows the tension from the strings to pull the headstock up. If you really loosen the truss rod too much, your neck exaggerated will look like a smile. :)

Tightening the truss rod makes your neck straight. It will make the strings come down very low to the frets. This can be great and make your guitar very easy to play. But if you overtighten too much and force the headstock down, you can get fret buzz, usually between frets 1 thru 5.

Turning the truss rod too loose has the opposite effect. It will raise the strings above the frets. This is good if you have been getting a little fret buzz. But if you go too far it can cause fret buzz, usually between frets 5 thru 12. Imagine a guitar string suspended over a bowl. If you press the string down over the center of the bowl, eventually the string will touch the outer edge of the bowl. This is what happens when you loosen the truss rod too much. You might fret a note at the 7th fret, but the string will touch the 12th fret and mute the string or cause buzz.

The purpose of the truss rod is to allow you to set the upcurve or "relief" of your neck just right. You usually want just a little upcurve. But just a little.

Here is a good article, especially because it has photos.

Adjusting Your Truss Rod

Adjusting the truss rod is nothing to be afraid. It is great because it allows you to adjust your guitar exactly the way you like it. Everybody is different. Some like a neck with a lot of relief, some like the neck straight and the strings very low.

But study these articles first. If you understand the truss rod, then it is a very simple procedure.