Sync with iCal will create a calendar in iCal corresponding to each context in OmniFocus. (named "OF: errands", "OF: phone", etc.) Then it will create "To Do" items in those calendars for each task in OmniFocus that has a context assigned. The project name will be added to the task name in brackets, in case you have the same task in several projects.
If you change a 'to do' in iCal (rename, check off, change priority, etc.), the next time you "Sync with iCal", those changes will be applied to the tasks in OmniFocus (and iCal will be updated with any changes you made in OF).
If you add a 'todo' to an OF: context calendar in iCal, that item will be brought into OmniFocus the next time you sync. It will show up in the Inbox with its context set, but no project.