What exactly do you do with the transclude function and the clone linking function?

EDIT: Completely and totally changing my answer and marking this as "Community Wiki" (meaning no points for me) as I was outright wrong when I answered this

As @Jonah pointed out below, here is a really good article on the compile option of directives and using the transclusion function

The basic idea is the compile function should return a linking function. You can use the transclusion function provided inside the linking function to take a clone of the transcluded DOM element, compile it, and insert it wherever it needs to be inserted.

Here is a better example I've pulled out of my butt on Plunker

The idea of the compile function is it gives you a chance to programmatically alter the DOM elements based on attributes passed BEFORE the linking function is created and called.

// a silly directive to repeat the items of a dictionary object.
app.directive('keyValueRepeat', function ($compile){
  return {
    transclude: true,
    scope: {
      data: '=',
      showDebug: '@'
    },
    compile: function(elem, attrs, transclude) {

      if(attrs.showDebug) {                
        elem.append('<div class="debug">DEBUG ENABLED {{showDebug}}</div>');
      }

      return function(scope, lElem, lAttrs) {
        var items = [];
        console.log(lElem);
        scope.$watch('data', function(data) {

          // remove old values from the tracking array
          // (see below)
          for(var i = items.length; i-- > 0;) {
            items[i].element.remove();
            items[i].scope.$destroy();
            items.splice(i,1);
          }

          //add new ones
          for(var key in data) {

            var val = data[key],
                childScope = scope.$new(),
                childElement = angular.element('<div></div>');

            // for each item in our repeater, we're going to create it's
            // own scope and set the key and value properties on it.
            childScope.key = key;
            childScope.value = val;

            // do the transclusion.
            transclude(childScope, function(clone, innerScope) {
              //clone is a copy of the transcluded DOM element content.
              console.log(clone);

              // Because we're still inside the compile function of the directive,
              // we can alter the contents of each output item
              // based on an attribute passed.
              if(attrs.showDebug) {                
                clone.prepend('<span class="debug">{{key}}: {{value}}</span>');
              }

              //append the transcluded element.
              childElement.append($compile(clone)(innerScope));
            });

            // add the objects made to a tracking array.
            // so we can remove them later when we need to update.
            items.push({
              element: childElement,
              scope: childScope
            });

            lElem.append(childElement);
          }
        });
      };
    }
  };
});