It is a diagnostics / fault finding tool. Basically an Apple tech would attach it to a problem machine via SCSI or serial (I'm not sure which) and then could run a variety of tests on the machine to try to locate the fault. From what I've heard, there are several ROM sets for the Techstep which allow you to test different models of Mac.

That's as much as I know, surely there's someone here who owns one...?