Install the program. Then, when you come across a Web gadget you'd like to turn into a Vista gadget, you click a few buttons to display the underlying HTML code for the gadget. Then you copy and paste that code into Amnesty Generator, change a few settings if you wish (such as the name of the gadget or size of the gadget), and tell Amnesty Generator to turn it into a Windows Vista gadget. The gadget will appear in the Windows Vista Gadget Gallery; from there you can move it to the Sidebar. It will work just like any other Windows Vista gadget.
Not every gadget you find on the Web will be able to be converted and run properly. But there's no way to know ahead of time which will work and which won't, so you'll have to find out by trial and error.