Bluetooth is a wireless communication between various electronic devices. like cell phones and laptops. It works over short distances. Many devices can operate together (multiple channels so to speak). For example it allows a cell phone to work wirelessly with "hand-free" devices like headphones and in the ear devices.
The are different "kinds" of bluetooth. Some devices can only send audio that is mono (most early devices - which works fine with hands-free earphones) newer devices support stereo (AD2P) which is nice since there's no cord between the device and the headphones. If your cell phone manual lists AD2P bluetooth then you can get yourself some stereo wireless headphones and rock out.
The Bluetooth Name:
Bluetooth started as the code name for the association when it was first formed and the name stuck. The name "Bluetooth" is from the 10th century Danish King Harald Blatand - or Harold Bluetooth in English. King Blatand was instrumental in uniting warring factions in parts of what is now Norway, Sweden and Denmark - just as Bluetooth technology is designed to allow collaboration between differing industries such as the computing, mobile phone and automotive markets.
Bluetooth FAQ site:
http://www.bluetooth.com/Bluetooth/SIG/FAQ/