When this icon is selected, the data created will be compatible to PostScript Level 3. PostScript Level 3 has many advantages compared with Level 1, mainly CMYK colours and more precise positioning and page formats. Furthermore, Bridge 7 can use much more PostScript features in PostScript level 3 which are not supported by PostScript level 2.
We recommend basically that you use at least Level 2 format output to avoid colour and positioning problems. But as not all PostScript interpreters are Level 2 compatible (e.g. Calipso v1.x), you can switch off this option here.