ORIGINAL: Geoff997
LSD works to increase traction, which by now we all know means an increase in handling. There are different mechanical styles of LSD's and then different settings on them.
Open Differential: A differential allows the tires to run at different speeds. This allows the car to turn, because the inside wheel will always be travelling a shorter line. So the power goes to the outside wheel, which has a harder job to perform. To make it easy, with an open diff, the wheel that is spinning more gets the power. That means that during a high power launch, only one tire will get the power and keep spinning. When an open differential gets one or both wheels in a limited traction situation, like one wheel on ice, it sends 100% of the driving torque to the least laden wheel, which results in you going nowhere fast.
Clutch LSD: (997 type) These transfer power through a clutch in the differential. As one wheel starts to spin, the clutch applies pressure and transfers power to the other wheel. The more pressure, the more power transferred. In limited traction situations, like where both wheels are on ice, the two wheels remain locked to the carrier and will pull together and help pull you out of a problem. In situations where you have one wheel on a limited traction situation, the other wheel will slip, just like an open diff except that the clutch pack assures that it carries some proportion of the available torque. LSD's also provide some major handling advantages, by guaranteeing torque will be transmitted to the outside drive wheel in a turn, even if you have lifted the inside wheel off the ground. Under acceleration the LSD allows you to put more power to the road and helps keep the car straight. Similar advantages are noticed under braking also.