The Auto Lighting Optimizer is a feature that attempts to improve the contrast of a photograph by adjusting the overall tonal range. It does this by applying a more attenuated tone curve when saving images to JPEG. As such, it only affects JPEG images, and has no effect on RAW images.

This is in contrast to Highlight Tone Priority, which affects the original output from the sensor, and does affect both RAW and JPEG images.

I personally do not use either of these camera modes. ALO only affects JPEG, and I only shoot in RAW. HTP is changing things behind the scenes, and I prefer to have control over my photographs. That is most certainly not to say that the features are useless...they have their place. They are most useful when you have little time to think about your shots, and just have to take the shots you have. This is often the case when photographing sports or weddings. Enabling ALO or HTP can help ensure that your photographs don't accidentally get blown out or end up too washed out, without having to put a lot of effort into ensuring as much yourself.