Activation is exactly as it sounds, it allows you to activate the iPhone without an AT&T contract so you can use it. There are a lot of people who want to use it without the phone part.
Jailbreak allows you to install 3rd party apps on the iPhone. My recommendation is to use AppTapp (available from http://iPhone.nullriver.com/beta/) to install anything on the iPhone. It makes like a thousand times easier than having to connect it every time to your computer.