Basically a ViewModel is a wrapper around model. Now that might not be very helpful yet :-) Think of the model as the data your application works with, say a person. Now a person has a birthday and you might want to have a form to enter the person's birthday. Suppose we are just using a simple TextBox the date shows up something like 01-02-2009 12:00:00AM. For starters we don't want the time part and we also might not be to happy about the 01-02-2009 part as this depends on your locale settings.
So here the ViewModel comes im. It wraps the Person class and exposed the date as three integer values, year, month and day. In the property set it tries to build a date from the different values and displays any errors that might occur.
So simply said a ViewModel is a Model wrapper specifically geared towards a particular view (display). It eliminates most IValueConvertors at the same time.
Josh Smith has a nice explanation here: http://joshsmithonwpf.wordpress.com/2008/11/14/using-a-viewmodel-to-provide-meaningful-validation-error-messages and a big discussion here: http://groups.google.com/group/wpf-disciples/browse_thread/thread/3fe270cd107f184f?pli=1