The device is always attached to Alyx's belt, and she regularly uses it to bypass Combine security systems or open locked doors. It can also be used to gain access to Combine computers and information they store, giving the Resistance pivotal information on the Combine.
In Episode One, Alyx also uses it to re-program Rollermines to attack Combine troops, Zombies, Overwatch Snipers and Stalkers, allowing Gordon and her to proceed further towards the core. This function may be done in a similar way that it is used to hack the Combine computers.
All of the previous functions are done by an electric pulse tunneling from the EMP Tool to the nearest electric conductor. The Combine's somewhat superfluous use of technology to manage and control the City makes this function highly useful.
The tool can also be used to store information, much like an USB key of sorts. Alyx uses it to store Judith Mossman's message and encrypted files about the Borealis, which she delivers to Isaac Kleiner for analyzing at White Forest. To download or upload data, it is simply a matter of plugging it into a computer and copying the required data.
At the end of Half-Life 2, Judith Mossman threatens Breen with it, hinting that the tool can be used as a weapon against living objects, possibly to electrocute or stun them. However, it may be that it simply looks threatening. After scaring off Breen, Mossman uses it to free Gordon Freeman from his cell, possibly via a similar method used to open locked doors.