Convert option on sync summary page?

What exactly does the option "convert higher bit rate songs to 128 kbps aac" do? Does it only convert the songs on the Ipod to save space, or all songs in my library? This could be useful to cram more songs onto my ipod, but I don't wish to convert all of my music to that bit rate. Any help would be appreciated. Thank you.

Just beware, it takes HOURS to convert these songs on the fly, so don't start this if you need to grab your ipod and go in a few minutes.
Also, the lyrics don't show up on the ipod using this feature (if you care about that, which I do).

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