It can be used to intercept unencrypted cookies from websites by using Packet Sniffing.
In plain english - if you are accessing sites like Facebook, Twitter in a public Wifi , a person using FireSheep extension can find out what you are doing and may be even impersonate you as the FireSheep user may get your login credentials.
It is developed by Eric Butler and currently available for Mac OS X and Windows.
More details can be found here http://codebutler.com/firesheep
