Rooting Description

Most devices running Android must be rooted in order to install custom versions of the Android system such as CyanogenMod. The stock configuration (unrooted), user-installed applications do not have direct access to the flash memory chip on the device and are not able to replace or modify the operating system itself. Rooting is also necessary for certain applications and widgets that require additional system and hardware rights such as rebooting the phone, certain backup utilities, and other access to other hardware such as status LEDs. Rooting is also needed to disable or remove manufacturer-installed applications such as City ID. Rooting the phone typically also includes installing an application called Superuser that supervises which applications are granted root rights.
In contrast to iOS jailbreaking, rooting is not needed to run applications not distributed by the official Android Market (sometimes referred to as "sideloading"). However some carriers, like AT&T, prevent the installation of applications not on the Android Market in firmware,[2] although the new Samsung Infuse 4G from AT&T allows running applications not downloaded from the market.

As of 2012 the Amazon Kindle Fire is locked to the Amazon app store instead of the Android market, and other vendors of Android devices may lock to other sources in the future. Access to alternate apps may require rooting but rooting is not always necessary. As an example, for the Kindle fire it is possible to load the "easy installer" app from the Amazon app store and then use it to "sideload" apps from any source.

One of the potential downsides to rooting is some phone makers consider it to be "modifying" the phone, which may void the warranty.  However, if the phone is un-rooted before the user tries to use his or her warranty, there is no easy way for the warranty provider to know that the phone was previously rooted.  The term "bricking" is used to describe a device which has had its software modified improperly to the point where it is no longer functioning.
source http://en.wikipedia.org/wiki/Rooting_%28Android_OS%29#Description