What does Settings->Privacy Settings->Back up my data do? I'm Running 2.3 Gingerbread.
There is a setting
Settings->Privacy Settings->Back up my data

If checked, what data does this back up?
Where is it backed up?
How do I restore it?
This setting backs your data up to Google's magic cloud. It includes what apps you have installed, and some apps' settings (if they are written to take advantage of it) which are restored when you first sign in to a new phone.

Relevant quote from the Android 2.3 user guide, pg 18: 


  You can choose to back up some of your
  data, such as your bookmarks, your
  user dictionary, your Wi-Fi passwords,
  and many other settings, to your
  Google Account, on Google servers.
  Some third-party applications may also
  take advantage of this feature. That
  way, when you need to replace your
  phone (when you upgrade or replace a
  lost phone), or if you reinstall an
  application, you can restore your
  settings and other data. For
  information about changing this
  setting later, see “Privacy settings”
  on page 370.


That setting controls apps' ability to use this API, which includes Google's apps such as Market.