The switch is handy if you've got something connected to the TX / RX pins and want to upload new code. Press the switch when the upload starts and you won't have to disconnect whatever is on TX/RX.
I'm not even sure if this is an official function, just a tip I got from a friend that has saved me lots of time.
Depends what it is connected to the TX/RX. If it a serial LCD for example, you can completely screw it up by having it connected when uploading code.
The best option is to use newsoftserial and not connect anything to pins 0 & 1.
Mowcius