This will create a little window that represents an entirely new desk top. If you choose it, you will get a whole new set of windows. You will see that the project window now shows a miniature view of the desktop in that project. This is neat, because the original Smalltalk-80 didn't do that, but everybody thought it should. Thus, it isn't hard to keep project code separated.
Images are extremely convenient and fairly fragile.
Every so often you will kill an image, and you will lose everything in it. It is possible to recover from your changes log, but it is real pain if you have several weeks of work there to recover. I make it a point to build a new image once a week or so. Some people do it every day. It all depends on your style, I guess.