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Basically it unlocks your phone and allows you to run unsigned code.
When you jailbreak, you will get a new application called Cydia - this is almost the hub of everything. This allows you to download various applications (mostly free although some are paid). These apps allow a variety of things - for example there is a YouTube app (can't remember the name) which allows you to download videos for offline viewing. There is Winterboard which allows you to add themes to your Sprinboard (desktop) changing the wallpaper and icons etc. You can change the number of icons on the dock (I used to have 5).
When you jailbreak, you can almost do anything with your iPod.
There is also an application which will allow you to unlock your phone to any network (although each new firmware version attempts to stop this!)
If you are interested, google redsn0w...
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