A ROM is like a new software version. Think of it like a Linux distro (if that means anything to you). They're all the same at the core, but they have different tweaks, looks, included apps, etc. If that doesn't make sense, think of different Windows versions - Home, Ultimate, Student, etc. That's a slightly-less-apt analogy, but it works.
When you flash, everything is erased (except recovery partition, radios, and your SD card). You need to restore apps and contacts and such. Fortunately, that's mostly synced with Google or can be backed up with free Market programs.
