What does it do?
Without having had a go on one myself, I couldn't say for sure…
Would hazard a guess Apple is aiming it at people for whom the iPhone is their first encounter with an Apple product, and have subsequently considered buying more Apple products, but been put off by the price and different Operating System of a Mac.
That, and those that dislike or aren't familiar with a more "conventional" computer interface.
Looks to me like it will be some kind of crossover between an iPhone/iPod Touch and a conventional laptop. Obviously, due to its size, it's not aimed at the fully mobile market, but perhaps as an alternative to a laptop for those that are less computer savvy than a lot of us?
I won't be buying one for certain, but then I'm not scared of computers… I'll just upgrade my old MacBookPro to something newer when the time comes, and my 3G iPhone to the new 4G version when that finally comes out… 😉