Since ya'll want the details:
There are two things that fps_max affects.
1) To-server update rate. You send an update once per frame, so a low fps_max can limit your update rate. Ever see a player moving normally then suddenly jerk around? His FPS just tanked, his updates slowed down, and the game is in a panic that he isn't sending as fast as he promised. Assholes used to abuse this in CSS, which is why fps_max is a locked cvar during gameplay.
2) Mouse update rate. Source engine only checks for input once per frame. Your mouse has its own refresh rate. PS/2 mice default to 100Hz but can be jacked up to 1000Hz, though some would go nutty if you did. I put my MX518s on 500Hz without any problems, 1000Hz, it was not happy. However, USB mice are handcuffed to your USB bus, which can be overlocked, but at your own risk since EVERYTHING attached will be put into turbo mode. Normally, it's 125Hz, period.
How this matters: on each frame, the game is going to pull all the cached mouse motion events. On a low performance system, you get that sluggish laggy feeling. On a high performance system, you might begin to experience jitter due to one frame getting one mouse update, and the next getting two, skipping the first of those two, making it seem to move in a twitchy way.
Fun way to see this in action: When the screen is dark (e.g. map changes) and you have your mouse pointer visible, trace rapid cricles. Thanks to persistence of vision and slow phosphor/LCD responsiveness, you should see a trail effect. Depending on your display and mouse ratios, there will usually be gaps in otherwise evenly-spaced cursor pointers.
In practice, if you get your mouse on something like 500Hz, even on my display (120Hz CRT, no latency bitches) a jitter caused by the fps/mouse sync ratio would be a difference between taking every fourth and every fifth mouse update; the others are discarded as old news. 250Hz would be plenty for anyone stuck on one of those silly 60Hz and 75Hz displays. Poor things.
Source loves to suddenly turn to shitty FPS and the hit reg problems are FAR bigger than anything a mouse refresh adjustment or FPS cap could do to you. But, if you have a powerhouse system, you CAN sync your display and your mouse refresh and your FPS cap to get one hair's breadth closer to perfection. If I were guaranteed the framerate you get, I would invest it by enabling VSync so I wouldn't tear anymore.
There is for a client to run fps_max in excess of the display's ability except to waste electricity, and if you can sustain >refresh_Hz, use VSync to guarantee the timing fix and eliminate any tearing issues. The real use for fps_max on a lower system is to simply smooth it out for the user. If you swing between 30fps and 90fps because of a crap video card, you can lock it onto something like 40fps and just get used to playing on that without the swings between fast and slow framerates.
