Let me take the time to say this: Overclocking is a risk you can take to your CPU, motherboard, and other components of your computer. I in no way assume any responsibility for any damage you may have done. So proceed at your own risk! Remember that CPU and most motherboard warranties are void once you overclock.

What is overclocking?
Overclocking is setting your CPU to run faster than the intended speed of the manufacturor.

How is overclocking possible?
CPU makers test the core of processors and rate the speed of it. For example, a Intel Duo Core E2140 1.6Ghz is just a 2.0Ghz chip that did not pass Intel’s testing for 2.0Ghz. Or, there was more demand for the Ghz, so Intel "underclocked" the 1.6Ghz so that they could sell more.

What affects can overclocking my CPU have (short/long term)?
In general, you will not fry your CPU. Just don't be crazy and overclock unrealistically. In the long term, it may shorten the life expectancy from about 10 years to about 5 years. What can I do to minimize the risks of overclocking?
First, you should ALWAYS have a heatsink/fan. Thermal paste is good too because it allows better heat conductivity between the heatsink and the CPU (as opposed to air, which is a bad heat conductor). You can get paste for a couple bucks. A case fan is recommended too.

Reasons for Overclocking
In a word, MONEY. If you want to upgrade your existing CPU or get the most out of a new one, you can overclock and save quite a bit One of the best examples is Intel DuoCore E2140. Many can overclock to 3.2 GHz and mirror performance of the Intel Core2Duo E6550 . That could go toward more RAM, a bigger hard drive, better video card, or other accessories.

If you have money to burn (I know I don't), then consider the enormous performance gains obtained through overclocking. Current Intel CPUs are only marked for 3.2GHz max. You could take that CPU up to 70% or higher, which would significantly improve all aspects of your computer performance. Anything from office apps to games would benefit from the extra speed.

Overclocking : How to
Step 1: Be prepared!
Having a heatsink and a fan is a must for newer processors, and strongly recommended for everything.

Step 2: The manual
Pull out your motherboard manual for information on how to change the jumpers or DIP switches for your multiplier/bus speed/voltage. New Generation motherboards have the settings in the BIOS (called "soft-jumpers") so you can change them in there, without opening up the case.

Step 3: Increase the bus, if possible
Overclocking the bus ("overbusing" as I call it) is the most effective because it increases the CPU speed, the memory speed, the cache speed, the AGP speed, and the PCI-Express speed.

Step 4: Increase the multiplier
If the increased bus speed doesn't work, you can try to raise the multiplier instead. This only increases the CPU speed, so memory/PCI devices won't give you problems.

Instabilities
If the overclock doesn't seem to last...A good test is Quake II or another CPU-intensive task. If there are crashes, try these: 1) Thermal paste! For a few dollars, this increases heat conductivity from the CPU to the heatsink. Apply a thin amount under the heatsink. 2) Lower your CPU speed-perhaps you have gone too far. 3) Raise the voltage. Beware the risks of raising the voltage. You should go over 15% above, and also, more heat will be generated! However sometimes it is necessary for stability.