Cloaking is delivering something different to the Googlebot to what you deliver to the user. The concept is that you detect the Googlebot user-agent or IP address, and give it a nice text rich page. For everyone else, they get to see a nice looking page that isn't always keyword rich. If you get caught cloaking you will get banned, so keep that in mind before you start experimenting with it. (unless you are BMW in which case it's all good link bait)
From Wikipedia : Cloaking is a black hat search engine optimization (SEO) technique in which the content presented to the search engine spider is different from that presented to the users' browser. This is done by delivering content based on the IP addresses or the User-Agent HTTP header of the user requesting the page. When a user is identified as a search engine spider, a server-side script delivers a different version of the web page, one that contains content not present on the visible page. The purpose of cloaking is to deceive search engines so they display the page when it would not otherwise be displayed. Cheers