The laser bone saw was an energy-based medical tool, used to amputate limbs and cauterise wounds.
When Dave Lister became infected with the intelligent Epideme virus, Kryten came up with the drastic solution of forcing the virus into Lister's arm and then using the laser bone saw to cut the limb off. With no other choice, Lister was forced to consent. Upon the procedure, the Cat said that it would be a cold day in hell before he would eat barbecue wings again. However, the procedure was a failure, with the wrong arm cut off (since Lister's right arm did all his favourite things), and unfortunately since some of Epideme's cells managed to remain in Lister's body and multiply.
Kristine Kochanski then came up with another drastic solution. They induced a cardiac arrest in Lister, so that Epideme would reanimate him, and Lister bit Kochanski on the arm to carry on the plague. However, Kris had tricked Epideme by using the arm of Caroline Carmen - one of Epideme's earlier zombiefied victims - filled with blood and cut it off with the bone saw and ejects it into space. Cat fainted and Lister was then resuscitated. (Epideme, Series VII)