This application has one main reason to exists. It lets you manage all host aliases you have in your OS X Directory Services.
It uses the dscl command to create Host entries and map them to 127.0.0.1. This is an alternative that OS X provides to aliasing /etc/hosts.
Imagine that you want to create an alias for you web app that points to your web server. The old way would be editing your /etc/hosts and add and alias to localhost.
With Directory Services App you only need to click on "+", add your alias and BAM! it's done.
It's better because Directory Services App uses the OS X Directory Services to manage the aliases. The gotcha is that it only works on OS X Leopard.