Forstner bits bore precise, flat-bottomed holes in wood, in any orientation with respect to the wood grain. They can cut on the edge of a block of wood, and can cut overlapping holes. Because of the flat bottom to the hole, they are useful for drilling through veneer already glued to add an inlay.
The bit includes a centre point which guides it throughout the cut (and incidentally spoils the otherwise flat bottom of the hole). The cylindrical cutter around the perimeter shears the wood fibres at the edge of the bore, and also helps guide the bit into the material more precisely.