Yah, it's a source RPM. It will install the sources for a program in the same tree that Red Hat (or whoever packaged it) originally used to build the regular RPM. Usually somewhere in the /usr/src/redhat tree. It will also usually include the spec file used to build the regular RPM.
There is rarely any reason to use them. Red Hat supplies them because they are proactive on GPL - instead of giving sources to whoever asks for them, they make the sources widely and easily available. Smart business decision for an Open Source vendor - look at all the bad publicity Lindows and Caldera got for making their sources difficult to obtain.
If you always install everything from RPM you are unlikely to benefit from rebuilding your programs from source. However, if you install libraries or other shareable objects by some method other than RPM, the dependency tracking that RPM provides will no longer work, so you might need to rebuild anything that uses the non-packaged objects.
Also, if you want to rebuild a package with options Red Hat does not use - for example, if you want the native LDAP support in Samba 2.x - but you want all the Red Hat patches, then you can unpackage the source, modify the spec file and build a new RPM. This RPM can then be installed on your system and you will have all the dependency checks etc. that RPM provides. I recommend if you do this you change the name of the RPM - in this example, from samba to samba-ldap - so that you don't accidentally step on your modified package while doing routine patching or system upgrades.