Arduino is a tool for making computers that can sense and control more of the physical world than your desktop computer. It's an open-source physical computing platform based on a simple microcontroller board, and a development environment for writing software for the board.
Arduino can be used to develop interactive objects, taking inputs from a variety of switches or sensors, and controlling a variety of lights, motors, and other physical outputs. Arduino projects can be stand-alone, or they can be communicate with software running on your computer (e.g. Flash, Processing, MaxMSP.) The boards can be assembled by hand or purchased preassembled; the open-source IDE can be downloaded for free.