Ok here's the basics, jailbreaking was started by a hacker named geohot.
Geohot was tired of the sucky apple restrictions on their new iPhone and iPod touch.
He started playing around with apple firmware and found a way to install custom packages. These packages kept you out of the app store, enabled custom iPhone and iPod touch themes, enabled use of cracked apps and roms and emulators to be used on the apple touch devices.
Well known jailbreak packages:
Installous: allows you basically to get any app you want for free if it's cracked.
Winterboard:originally summerboard, allows the useage of custom themes and settings.
Cydia: The default installer after you jailbreak allows the installation of packages.
A lot of people say jailbreaking can screw up your Device.
ONLY IF YOU DUE SOMETHING STUPID.
Like try to jailbreak a new firmware with a old jailbreak Tool.
Or turning of your device in the middie if the jailbreak
Jailbreak at your own risk, if you don't know what your doing dont try it,
Have Someone else do it for you.
Remember, you can always restore to unjailbreak your device.
Stay anonymous, Dark Dante_ v2