Something odd happens to a person when they write a story out. It becomes very precious to them - they'll put up with all sorts of crap from it because they love it. I can say in all honesty that that is one reason that I've not given up on the Manda after about 5 drafts - I adore this idea and these characters. Never mind the plot holes, unsympathetic characters and the like.
This is a good thing - it allows a writer to go through the insanity of drafting, re drafting, editing, nit picking and so on. But the very obvious down side to being in love with you work is that you don't see it's flaws.
This is where the Beta reader comes in handy. these are the people (they can be other writers or just readers) that go over your work and point out everything that your love addled brain can't see. Now, some of these things you will notice if you leave the manuscript alone long enough, but you will never be able to pick up all the problems.
So the Beta readers point out the problems, and explain why they are problems. You can either agree or disagree (a lot comes down to perception as well, as it tends to do when it comes to that which is creative) but if more than one beta points something out, then you know you've got a problem.
This is bloody useful because once they explain something to you several times around, you actually start to get it, and notice it yourself, sometimes even while you're writing it. But even more useful a process, is your reciprocation.
While someone is tearing apart your piece, and you're feeling like crap about it, you get to tear apart theirs. Now why is this important? It's important due to the fact that you know exactly how they feel about this piece (it's their baby, they're attached to it, it has not a fault in the world) because you are feeling exactly the same thing as they tuck into yours.
And once you make that empathetic connection, you start to think that maybe they're not being vindictive when they point things out. Maybe this is god to honest what they see when they read your work.
Which brings me to the single most important thing that beta reading reveals. The gap between author intent, and what the reader actually receives in character, plot and narration.
Say you write a story about a woman who runs away with her child, out of what you want to communicate is an emotionally abusive relationship. However, your reader sees her as a hypocritical bitch who has just kidnapped a man's life and joy. That is a huge gap - the closer you bring the readers perception of the story and what you intend to say, together, the better your story gets.
Now, this isn't to say you can close that gap for everyone. A perception gap relies on... well, perception. So when it comes to betas you can take one of two roads - either rely on your instincts as to what the beta is correct/incorrect about, or have more than one beta. Or a combination of both.
I have immensely enjoyed both betaing for other people, and having them beta for me. It broke me out of the "writing for myself" stage, and drew me on to "writing for an audience". Strangely enough, when you're writing for someone else, you start to do things in your novels a lot more consciously.
I've found it useful :D