Brolloks just explained it. It's a temperature at which the CPU will start to throttle in attempts to lower your CPU temperature and prevent damage.
You always want to have a significant Distance to TJMax. I use 30 at Load as a rule of thumb for safety, but since I've acquired this first stepping i7 I've reduced that to 20.
The temperatures you see on RealTemp and CoreTemp are not actual readings, they are derivatives of raw data (distance to TJMax) provided by diodes embedded in the CPU cores.
I suppose you could say: TJMax - Distance to TJMax = Temperature Reading Output of given monitoring software.
RealTemp should automatically aquire your CPU and assign the proper TJMax (or as close as anyone has been able to gather). As you increase your TJMax variable by a certain amount, the displayed temperatures increase by that same amount. But don't take that as a bad thing automatically, because your thermal junction Maximum has also gone up by that same amount, so it all evens out.
Distance to TJmax should stay the same.
Also, do not trust idle temps. The thermal sensors within a core2 (or i7 as far as I know) don't have so much sensitivity below ~50degC or so. You can attempt an idle calibration with RealTemp which seems to have some good theory behind it, but in general it's your load temperatures(in particular your Distance to TJMax) that you want to keep an eye on.
If you'd like to do some more in-depth reading, here is the link to the official thread over at XS:
http://www.xtremesystems.org/Forums/showthread.php?t=179044