Head-free mode is great for beginners who aren't used to projecting their mind into the plane's perspective. Head free (or Care free) mode uses the compass and your last known position to transform the transmitter stick input from your perspective into the perspective of the copter. For most beginner pilots this is the toughest part, imagining in your minds eye, you are sitting in the copter and facing the same direction. Head-free mode removes this burden! The copter control software, knowing where you are, adjusts the stick input so that roll left is always left on the copter from your perspective and roll right is always right, and the same with the pitch. You take away the notion of a "front" on the copter, there is no front anymore!
Since the copter can't sense where you actually are, it has to assume that you were behind the copter when you armed the motors. It also doesn't know how far away you were, so you have to keep the copter in front of you at all times. If it goes too far to the left or right of you then the control response will become strange. The copter doesn't truly know where you are, it assumes you were behind the copter during arming and at an “infinite” distance away so-to-speak.
Some people are reporting that control is off or becomes rotated after activating the Head-free mode. I have been unable to reproduce the behavior after a lot of use on many copters. One thing I suggest is if the copter control still seems to be off under HEAD-FREE, then land the copter and move yourself 90 degrees around the copter to where you feel the copter seems to think you are and try again. One of the other three directions is correct.
Here is the process I use to setup the copter for Head-free mode: