I cannot for the life of me find a definition of what the Java VM flag CMSClassUnloadingEnabled actually does, other than some very fuzzy high-level definitions such as "gets rid of your PermGen problems" (which it doesn't, btw).
I have looked on Sun's/Oracle's site, and even the options list doesn't actually say what it does.
Based upon the name of the flag, I'm guessing that the CMS Garbage Collector doesn't by default unload classes, and this flag turns it on - but I can't be sure.
Update This answer is relevant for Java 5-7, Java 8 has this fixed. (Kudos go to mt.uulu.)
For Java 5-7:
The standard Oracle/Sun VM look on the world is: Classes are forever. So once loaded, they stay in memory even if no one cares anymore. This usually is no problem since you don't have that many purely "setup" classes (= used once for setup and then never again). So even if they take up 1MB, who cares.
But lately, we have languages like Groovy, that define classes at runtime. Every time you run a script, one (or more) new classes are created and they stay in PermGen forever. If you're running a server, that means you have a memory leak.
If you enable CMSClassUnloadingEnabled the GC will sweep PermGen, too, and remove classes which are no longer used.
[EDIT] You will also have to enable UseConcMarkSweepGC (thanks to Sam Hasler). See this answer: https://stackoverflow.com/a/3720052/2541