Geocaching is a sport/hobby that involves using geographical coordinates and a GPS to look for containers hidden in the woods, in cities, on top of mountains, underwater, in lamp posts, inside of logs, etc. When you find one, you sign a log to prove you were there, and optionally take a prize from the cache, replacing it with a new one of equal or greater value.
It's not about the prizes though - they tend to be pretty lame. The fun is in exploring trails and areas you might never have visited otherwise - it's a great way to discover new terrain. It can also become a semi-competitive sport, once you get into it. Geocachers compete to find the most caches in an area, to find caches in every county or state, etc.
Every cache has two difficulty ratings: The difficulty of the hide itself (how well concealed it is) and the difficulty of the terrain (how hard is it to get to). Most caches are in the 2/3 or 3/2 range. Caches with a terrain rating of 5 require specialized gear to get to, such as scuba equipment, mountain climbing rigs, or hot air balloons :)
Of course, the most challenging caches of all are rated 5/5 - extremely well hidden and extremely hard to get to. Before I die, I'm going to find one...
shacker pulling an ammo can cache from Minkalo Cliffs, near Tahoe.