Filter is used for extracting desired results from junk. It used while viewing traffic source -> search engine visit/referring sites. To activate it just browse to the footer section for these deep section. Now choose the source tab to point out your desited filter identifier say if you like to filte out on basis of location or keywords or anything. Use excluding or including tag below to go thourgh the usual details.
Just by selecting your desired settings from a number of pretty easy to use buttons and you can filter down results of your choice.
Filter is used to block the unwanted traffic coming to your site. For example, you may want to filter the traffic coming from your own IP address. There is an option in GA in which you can block your own IP address or a range of IP addresses.