The object pictured here (which you guys nailed almost immediately) is known as a boring bar [insert drinking pun here], which is used on a metal lathe to cut the inside of a part. I use this tool less frequently than most of my other lathe tooling, but it is nonetheless indispensable. More about what to do with this sucker after the jump.
The boring bar is used on a metal lathe, a machine tool that spins a part while moving a cutting tool to remove material from the part, to enlarge the inside diameter of a work piece and, potentially, to cut that dimension to a tight tolerance. Typically, drill bits are used to machine smaller diameter holes in the center of work pieces, but if you've got a 2-inch hole to make in a piece of steel, you're reaching for the boring bar.
The large block on the right attaches it to the tool holder. The bar on the left is where the action happens, holding the cutting tool out away from the tool post, which allows it to be inserted into the center of a rotating work piece (assuming you've already got a hole in it big enough for the boring bar to fit in and, well, begin boring).
Making one of these is a reasonable project for the home machinist, and a useful one. Just don't talk too much about it or people may find you ... dull.
Congrats to PopSci user "1177", who guessed this tool right away! /2009-10/guess-what-4#comment-49519