Q:

What is overclocking the system?

I have heard this term many time and would like to know what does it exactly means?

A:

It basically means that people will alter the settings for their CPU (processor) to go faster than it was designed to do so. By increasing the CPU frequency, you're also obligated to change speed settings for RAM, the system bus and so on. So if you have an Intel or AMD processor that say runs at 2.0GHz, you can overclock that processor (depending on a few variables) to run at 2.3GHz or 2.4GHz. 
Pros

The good thing about overclocking is you can get better performance out of your computer without paying extra for a higher model. Most people who overclock are gamers, but I'm sure there are other uses for overclocking in computation and such.

Cons

Heat - Faster CPU means more electricity which means more heat. Heat can kill computer systems. Improperly cooled and overclocked CPUs can die a lot faster than you think.
Cost - In order to increase the speed, better cooling is necessary to dissipate the heat. From water coolers to fancy heatsink/fan solutions, you should put forth some money to address the heating problem. 
Possible Damage - People forget that by overclocking, you're going out of bounds for the manufacturer's specification. The extra work, electricity, heat can (over a period of time) damage your CPU. If you deal with heating properly your odds of damage decrease, but it's always a risk.

Personally, I don't overclock. It's a risk with little to no benefit that I can see. Others may feel differently, but I hope this answers your question.

A:

Overclocking is the process of running
  a computer component at a higher clock
  rate (more clock cycles per second)
  than it was designed for or was
  specified by the manufacturer, usually
  practiced by enthusiasts seeking an
  increase in the performance of their
  computers. Some of them purchase
  low-end computer components which they
  then overclock to higher speeds, or
  overclock high-end components to
  attain levels of performance beyond
  the specified values. Others overclock
  outdated components to keep pace with
  new system requirements, rather than
  purchasing new hardware.

http://en.wikipedia.org/wiki/Overclocking
Overclocking any component comes with inherent risks. Generally running anything faster will cause the heat to be greater, which can lead to a much higher failure rate. This is why most people will not tackle overclocking unless they are certain that their components are tolerant enough of the changes (and even then will only up the speeds in small increments) and will have good cooling systems in place to help mitigate the problem of heat.

A:

In addition to what TheTXI posted...
You are running the hardware beyond its rated limits. It can void warranties and damage hardware. You can see weird errors depending on the issues. It varies from each combination of hardware. It is mainly for the hobbiest or someone who wants to take the risk to get that little extra performance out of their machine.

