Bluetooth is a low-power low cost "wire-replacement" technology.
To break it down fairly simply, there are two main low-level links that Bluetooth maintains. One is an serial data connection, the other is an audio connection.
With the serial connection (SPP) you can emulate RS232 (COM ports), USB, Parallel ports, PS2, etc... basically anything. The protocol stack runs "profiles" which structure how the established link is used. There are numerous "profiles" for applications such as Dial-up networking, serial port, printer port, access point, fax, etc... it's really limitless and all software driven.
In addition, Bluetooth supports audio links as well. These connections (SCO) are made after a data connection has been completed and allow up to 3 simultanios audio streams between devices. The target usage of the SCO links are for handsfree / headset / and other wireless audio applications.
Some popular Bluetooth applications which will hit the market soon are...
Bluetooth headset's -> use a lightweight headset to replace the wired cellphone headset. When you receive a call, the Bluetooth enabled cellphone creates a connection to your headset and you can receive the call without touching your phone. Future headsets will be the size of hearing-aids, and have amazing battery life.
Data syncronization -> Bluetooth basically replaces the Serial or USB cable between your PDA/Cellphone/Laptop. Your palm sync's up to your laptop once it's in range.
Ad-hoc networks -> 4 Bluetooth enabled laptops can easily share documents, etc... software can allow this to emulate a real (ethernet) network and you can share internet connections as well.
BT keyboards and mice -> this is a no brainer for people who travel with laptops. carry a small mouse with you and use it for any BT enabled laptop!
The applications are really limitless, it's all software driven.
Some misconceptions of Bluetooth :
It's slower and shorter range than 802.11b so who cares? -> It had better be!!! or else your cell phone battery wouldn't last too long

the usage models of BT and 802.11b are very different, and 802.11b isn't very practical for portables yet.
It's range is only 5/10/15/20/whatever feet! -> Bluetooth has 3 different classes of devices
Class 1 -> Power range of 0dBm to 20dBm with power control. Range can be up to 100m (on a good day with the wind at your back)
Class 2 -> Power range of -6 to +4dBm. The most popluar range for portables because of power consumption. Specified range is 10 meters, although many solutions can go farther.
Class 3 -> Everything else below Class2

there will be some devices that only need a few meters of connection and will fall into this classification.
Also, there is some misconception about Bluetooth data rates. The maximum data rate of the modulation is 1Mbps, but in real links this is divided between uplink and downlink. The fastest connection in an asymetrical link is about 723kbps, when only one device is connected. That's fairly quick for a zero configuration internet connection.
Basically, Bluetooth was hyped so much because there are really many many applications which can use it. I believe that it will be a must-have technology soon because the price point is getting so low for embedded applications. I'd like to see all laptops, desktop motherboards, pda's and cell phones to have it embedded.
Hope this helps.