#include is used to include outside libraries in your sketch. This gives the programmer access to a large group of standard C libraries (groups of pre-made functions), and also libraries written especially for Arduino.
The main reference page for AVR C libraries (AVR is a reference to the Atmel chips on which the Arduino is based) is here.
#include, similar to
#define, has no semicolon terminator, and the compiler will yield cryptic error messages if you add one.