RAW is a format that your camera may optionally use that will store the image file in a way that is completely un-processed. Normally, your camera will process the image you shoot and adjust the white balance, exposure, saturation, contrast. The RAW format stores the imagefile in a pre-processed state. This means that the file is not compressed and therefore much larger than if you used JPEG. It also means that you must "process" the image in your image edition application before you can view it. This can also be an issue, you must use newer software that has updated support for RAW formats.
The image to the right shows the RAW conversion tool that can allow you to re-adjust the exposure, contrast, saturation, etc. This can be a great way to save a shot that otherwise might have been too under-exposed or the wrong white balance, etc.