What is it? Basically a specific use of the complete set of hypertext links they build while crawling the web. The links between people (or their website) described using XFN or FOAF can now be searched to discover who is linked to who, and on what site.
Practically, this means that when you register in a new social network, that site can ask Google who your relations are, and tell you who among those are already registered on this new network so that you can more rapidly rebuild your network in the new site. This service can also allow you to know what sites your friends are registered in, which might also be of interest to you.
It does have some serious limits though, as only public relations are indexed since Google obviously don't have your credentials to index your private data. A social graph is a valuable asset and can reveal quite a lot of private information, so many people and websites keep it private.
Maybe there will be a way with OpenID and OAuth to allow Google to index your private graph on behalf of you, but are we ready to let Google know so much about us?
Anyway, it's an interesting step forward that will push the adoption of FOAF and XFN (yes, I have to write my FOAF file!) and ultimately help data portability.