BABIP measures a player's batting average exclusively on balls hit into the field of play, removing outcomes not affected by the opposing defense (namely home runs and strikeouts).
For example, a hitter who goes 2-for-5 with a home run and a strikeout would have a .333 BABIP. He's 1-for-3 on the balls he put in play.
(H - HR)/(AB - K - HR + SF)
Watch: Although Orlando Arcia's sac fly does not affect his batting average, it does cause his BABIP to drop.
Why it's useful
BABIP can be used for both pitchers and hitters. It's often a solid indicator of a player's luck and future performance. Pitchers who have allowed a high percentage of hits on balls in play will typically regress to the mean. In other words, over time, they'll see fewer balls in play fall for hits, and therefore experience better results in terms of run prevention. The same applies for batters, but to a lesser extent.
BABIP can help decipher which hitters and pitchers have had their past results affected by luck -- either good or bad. An average BABIP is usually around .300.