It reduces the spectral density of the electromagnetic interference (EMI) that PC components generate. It can also hinder (or help) stability depended on what system you have. It helped the 3800x2 I had but didn't do nothing for my conroe.
Yeah it essentially "rounds" clock edges as far as I'm aware to reduce EMI. It's generally recommended to turn it off when overclocking as you want the sharpest, stabilest clocks you can get. Alternatively though I guess it could be possible that the EM noise might limit an overclock as well.
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