An effects look is a circuit within an amplifier that sits between the preamp stage and the power stage. It allows the insertion of effects for optimum operation. The idea being, get a clean, low-level signal from the preamp, run it through whatever effects (rack mounted, foot pedals, whatever) then take that signal and send it to the power amp.
Generally, you'd place time-based effects (delay, flanger, chorus, etc.) in the effects loop while you'd keep dynamic (volume, wha-wha, compressor/limiter, etc.) and distortion pedals before the preamp (a.k.a. inline with the guitar signal).
For example, with my Mesa/Boogie Mark IIb combo, I'll run my guitar into a distortion pedal, then the signal from the distortion pedal into the amplifier. Meanwhile, I'll have my chorus and delay pedals in the effects loop. This gives me optimum performance of the effects and the amplifier without weighing down my guitar's signal too much before it hits the amp.
Everyone else can probably be clearer, but that's the way I understand effects loops.
Nicely said. I'm buying some reverb soon, that'll go in my effects loop.
Edit: Only thing I'll add to GearBox's statement is that if you get most of your distortion from pedals and just use your amp to crank the volume, you can put your delay/reverb in front of the amp rather than in an effects loop... they'll sound very similar.