Musical instruments and microphones output a low-level signal that, on its own, is not strong enough to come through speakers without boosting. A preamp boosts a low-level signal to what's known as a "line-level" signal, or a signal that is powerful enough to come through speakers.
Sometimes the preamp is built into an amplifier as a stage in the signal chain. Other times, the preamp is a standalone unit. Also, in lieu of using a traditional amplifier, some musicians pair a preamp with a power amp, which sends the boosted, line-level signal to speakers. The three stages are the same, just separate rather than housed in the same piece of equipment. "Electret" microphones also have built in preamps.
In addition to boosting signal, preamps also give much greater tonal flexibility to the amplified source. Preamps usually have controls for tone or equalization, which is the adjustment of the different high and low frequencies of the signal. Having a volume control on the preamp, in addition to the master volume, gives the user lots of options in terms of gain (the measure of a circuit's ability to boost the power of a signal), which at high levels, results in overdrive.
A preamp is great for recording direct when you want the purest sound out of an instrument. It boosts the signal to line-level so it can be recorded, but it is much more transparent than an amp, and doesn't color the natural tone of the instrument in the same way.
There are a number of places to purchase preamps. For speakers, mixers and general sound concerns, electronic stores will carry basic preamps. For musicians, go to a local store such as GuitarCenter and try some of their many preamps made specifically for musical instruments. You can also find good deals online @ http://www.Zzounds.com.