Bluetooth is an industry protocol for short-range (sub 10m) wireless communications using radio frequencies. Bluetooth enabled devices speak a common electronic language and can establish a two way connection between each other when they come within range.
Applications include mobile phone to palmtop/laptop computer/headset, laptop/palmtop to LAN and there are other applications in the pipeline like enabling vending machines to communicate with your mobile phone allowing you to purchase items from vending machines using you phone bill account/credit!