The idea is that it is more secure to give every website a different password. If one site has naughty administrators, or gets hacked, the same compromised password won't work for your account on another site. But how can one remember a different password for every site? Don't, let the computer make one for you!
You remember one Master Password. (It is not stored anywhere, don't forget it!) Then, with a (somewhat simple) cryptographic hash function, the extension combines your master password and the domain name of the site to make another unique password for that site. The password is not saved in Firefox, or anywhere else. It's secure!
For example, if your master password is "Juice" and you are on "ebay.com" this tool will scramble those two pieces together and come out with "203a29e" for the password. However, if you are on "Google.com" with the same master password, the generated password will be "d382e9ce". Neither site has any idea what your real password is, or what your real password for the other site would be, even if they steal the password you used for their site.
There's two other nice features that make logging in even easier. You can configure a username and/or an email address to fill in, at the same time that the password is filled in.
For advanced users, with a catchall address at a domain, just put "@example.com" (whatever your domain is) for the address, and MPWGen will make a different email for every site too! The value will be inserted after the + sign, for email accounts that support this feature, like gmail.
