The code spy was born out of necessity back when DHTML became possible with the 4.0 browsers. How else is a developer supposed to view and debug dynamically created HTML on the client, without putting a ton of alerts all over the place?
Basically the code spy is a window into the DOM. When active, just by moving the mouse over the page all of the code within the DOM is revealed. The code spy also goes one step further and lets you directly manipulate code on the page.
An example of the code spy is hard coded into this page to give you a flavor for the tool. But the real power comes when you add an entry to the context menu and use the spy on ANY page that is active in your browser.
Oh, I almost forgot, at this point the code spy will work in IE only. Sorry, I just haven't had the time or need to re-write the code to work using the W3C standards, although it shouldn't be that difficult.