The "Schengen Area" is the name for the countries which have joined the Schengen agreement. These countries have abolished border controls (Passport controls) between them.
Most are also EU members, which have abolished customs controls between them. This means there is no border control at all, just a sign by the side of the road when you cross from one country to another.
These countries are sometimes referred to as "Schengen" for short, as in the "Schengen visa".
The full list of the 26 current (as of 2012) members of the Schengen area is:
Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and Switzerland.
Bulgaria and Romania are due to join Schengen in 2013.
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