You block items to allow your work to relax a little and your stitches to even out some. It also lets you adjust the dimensions of the work. For instance, I just blocked a sweater sleeve and stretched it so it was longer and narrower. In lace, when you knit the item, the pattern is often not clearly defined when you're finished, what with all the YOs and decreasing. So you block it to stretch out the pattern you worked so hard on. Here's a good visual.
How to block: You lay your work out on a large flat surface that is out of the way and won't be disturbed. You can lay your work out on a towel, a styrofoam board, those kiddie foam mats, an ironing board, pretty much whatever you like and is big enough. (I don't reccommend cardboard though, absorbs the water and warps.) Then you can either spray it down with a water spritzer, get it wet under the faucet, use a water gun :), however you want to get it THOROUGHLY damp but not really wet or soaking. Then you lay the work out like you want it to end up and pin the edges (with sewing pins, hat pins, etc.) every so often how you want it so that it will dry in that form. Then you leave it until it is BONE DRY.
Best of luck!