Dithering gets called into effect any/everytime you down-change your bit rate or do a conversion from Analog to Digital...
Essentially, it's the insertion of white noise into the signal so the conversion doesn't produce too many errors...
Of course, that's the WAAAAAY stripped-down definition, but pretty much it inna nut-shell.
The type of dither selected (rectangular/triangular/Gaussian) is how the white noise is applied to the signal... Basically the amplitude of noise inserted...
I leave things set at triangular in my Sonar settings, but I'm pretty sure that my ear wouldn't be able to discern any difference if I changed it whenever I change things from 24 bit to 16 bit before burning to CD
If you really want to delve into the nuts and bolts, there's articles like this:
http://www.planetoftunes.com/digiaudio/how_a_to_d.html
Hope this helps!