Adobe Camera RAW has been included in since Photoshop CS - it was a purchasable add-on for Photoshop 7. Adobe Camera RAW is a plugin for Photoshop that resides in the "Plug-Ins/File Formats" directory inside Photoshop. The plugin format allows it to be upgraded as new cameras with new RAW formats are introduced. Usually there is a lag between the introduction of new cameras and support for them in new Camera RAW plugins.
When a new version of Photoshop is released, subsequent updates to the plugin only work with the new version. Therefore, buying a new camera can mean needing to upgrade to the latest version of Photoshop. For instance, in Photoshop CS2, Camera RAW was up to version 3.7 which included support for all current Nikon dSLR except the newest Nikon D40x. Now that Photoshop CS3 is out with Camera RAW version 4.0, support for the D40x will require CS3 or higher.
The digital negative analogy is used often. Basically the RAW files are the unprocessed values as recorded directly off the camera sensor. Rather than have the camera do the image processing, this is deferred to the computer. This includes:
The noise reduction algorithms tend are much more powerful in camera raw than in-camera, making for cleaner high-ISO images.
There are also options for correcting lens aberrations, such as vignetting.
Depending on the camera A/D converter, you typically have 12 or 14 bits per channel, instead of jpeg's 8. Exposure compensation is therefore more capable.