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RAW is not a standard image file format like a JPG. Instead, it's the unprocessed stream of data straight from the imaging sensor. It's uncompressed, unfiltered, and as the name indicates, raw. The nice part is that with post-processing applications, you can manipulate far more aspects of the image such as white balance, exposure, highlights, etc and issues such as noise are easier to correct in a raw file. With a JPG you have a compressed image, where much of the information has been thrown away in the process of conversion to a JPG. With raw, you have all the information from the sensor, and basically have more to work with.
The downside is that applications must support the particular camera's raw format, since there is no standard that Canon, Nikon, et al can agree on. When a new camera is released it only takes a couple of months until the major software companies add support.