Provides a central transliteration service to other Drupal modules, and
sanitizes file names while uploading.
Generally spoken, it takes Unicode text and tries to represent it in US-ASCII characters (universally displayable, unaccented characters) by attempting to transliterate the pronunciation expressed by the text in some other writing system to Roman letters.
According to Unidecode, from which most of the transliteration data has been derived, "Russian and Greek seem to work passably. But it works quite bad on Japanese and Thai."
This question can't be generally answered, rather it depends on what you want to do with user submitted file uploads. There are two simple cases when you might not need transliteration:
However, whenever you want to process uploaded files on the server, you most likely need transliteration. For example, if you are using ImageCache to provide modified versions of uploaded images. The reason is that PHP 5 doesn't fully support Unicode characters in filenames, and may not be able to access those files.
Whether you use transliteration for URLs (when using Pathauto 2.x), however, is a matter of personal taste. For example, the russian Wikipedia does not transliterate, but uses full Unicode in URLs. On the other hand, as a user noted, links containing Unicode look quite ugly in e-mails sent from your site.
On Drupal 5, transliteration is required since Unicode characters in generated URLs (for example, file attachments) are not properly encoded in certain cases (#191116: Make drupal_urlencode RFC 1738-compliant).
3.x is now in beta!
If you would like to help make transliteration data better, the following sources might act as a starting point: CLDR — Unicode Common Locale Data Repository, especially the guidelines and available transliteration charts.