It's used in conjunction with Version Cue, so it won't work unless you save a file into a Version Cue workspace. It allows you to manage different versions of the one file.
For example, you might create a green image in Photoshop. The client might look at it and request that you change it to red. You could save the red file as a version of the green, and add a comment to it to say what changes you made. From your perspective, you're still working with the same file, which makes it easier to manage, especially if they make further changes. However, if the client changes their mind and wants to go back to a previous version, that image is still available.