What is Jailbreak?
In short, jailbreak is the process one goes through which allows the installation of unofficial third-party applications.
Is it illegal?
No, because you bought your iPhone so what you do with it is up to you. For example: break it, use it as paperweight, anything you want including jailbreak it. It is your belonging anyway.
US Government even set forth new rules, state that jailbreak and unlock their iPhone devices are not illegal.
References
http://www.iphonespies.com/iphone-news/is-it-illegal-to-jailbreak-your-iphone/
http://osxdaily.com/2010/07/26/is-jailbreaking-your-iphone-illegal-not-anymore/
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