A qubit is a quantum bit, the counterpart in quantum computing to the binary digit or bit of classical computing. Just as a bit is the basic unit of information in a classical computer, a qubit is the basic unit of information in a quantum computer.
In a quantum computer, a number of elemental particles such as electrons or photons can be used (in practice, success has also been achieved with ions), with either their charge or polarization acting as a representation of 0 and/or 1. Each of these particles is known as a qubit; the nature and behavior of these particles (as expressed in quantum theory) form the basis of quantum computing. The two most relevant aspects of quantum physics are the principles of superposition and Entanglement.
Think of a qubit as an electron in a magnetic field. The electron's spin may be either in alignment with the field, which is known as a spin-up state, or opposite to the field, which is known as a spin-down state. Changing the electron's spin from one state to another is achieved by using a pulse of energy, such as from a laser - let's say that we use 1 unit of laser energy. But what if we only use half a unit of laser energy and completely isolate the particle from all external influences? According to quantum law, the particle then enters a superposition of states, in which it behaves as if it were in both states simultaneously. Each qubit utilized could take a superposition of both 0 and 1. Thus, the number of computations that a quantum computer could undertake is 2^n, where n is the number of qubits used. A quantum computer comprised of 500 qubits would have a potential to do 2^500 calculations in a single step. This is an awesome number - 2^500 is infinitely more atoms than there are in the known universe (this is true parallel processing - classical computers today, even so-called parallel processors, still only truly do one thing at a time: there are just two or more of them doing it). But how will these particles interact with each other? They would do so via quantum entanglement.
Particles that have interacted at some point retain a type of connection and can be entangled with each other in pairs, in a process known as correlation. Knowing the spin state of one entangled particle - up or down - allows one to know that the spin of its mate is in the opposite direction. Even more amazing is the knowledge that, due to the phenomenon of superposition, the measured particle has no single spin direction before being measured, but is simultaneously in both a spin-up and spin-down state. The spin state of the particle being measured is decided at the time of measurement and communicated to the correlated particle, which simultaneously assumes the opposite spin direction to that of the measured particle. This is a real phenomenon (Einstein called it "spooky action at a distance"), the mechanism of which cannot, as yet, be explained by any theory - it simply must be taken as given. Quantum entanglement allows qubits that are separated by incredible distances to interact with each other instantaneously (not limited to the speed of light). No matter how great the distance between the correlated particles, they will remain entangled as long as they are isolated.
Taken together, quantum superposition and entanglement create an enormously enhanced computing power. Where a 2-bit register in an ordinary computer can store only one of four binary configurations (00, 01, 10, or 11) at any given time, a 2-qubit register in a quantum computer can store all four numbers simultaneously, because each qubit represents two values. If more qubits are added, the increased capacity is expanded exponentially.