It refers to the votage stepping of the processor, modern PIII's use either cBO or cCO stepping, which are 1.65 and 1.70 volts respectively. Some people claim that cCO stepping processors will overclock further, but I have seen no evidence of that. It may be that the cCO processor, at a stock voltage of 1.70v, will overclock as far as a cBO would if it were to be bumped up to 1.70v, but since most overclockers use adjastable voltage motherboards, this should not be an issue. The cCO might be handy for overclocking on motherboards that do not suport adjustable voltages, but most of those do not support adjustable bus speeds either. I think the cCO stepping was first introduced with the PIII 1GHz in order to make processors that were not stable at 1.65v work better, so in that respect, maybe the cBO, being able to run at a lower voltage, is of higher quality? I have seen so many arguments about this final point that I gave up on it. It may simply be that the cCO is made of a different material that has a slightly higher resistance (a bad thing for the cCO), or that the manufacturing process is slightly different.
Everything Crashman mentioned was correct, but also:
Simple put, a newer stepping is a newer version of the processor core. It's also a way to identify them. For the PIIIs, the Katmai cores all have steppings starting with "K", and the Coppermines with "C". I'd imagine the upcoming Tualatin cores with all start with a "T"
Each new stepping fixes some of the "bugs" in the older steppings (in theory). Your BIOS contains "microcode" which, depending on the stepping of your cpu, disables and/or enables certain functions on the processor. (So make sure you have a new BIOS if you use a new processor)