What exactly is Chi? Well, let us do a little exercise shall we? Now everyone, move your right hand. Very good, you just used chi.
Chi is the basic energy that flows throughout, and binds the universe together. It is the energy that causes change (life, death, movement, etc...). George Lucas got the concept of "The Force" from the taoist concept of Chi. There are many ways to understand chi, I will discuss a few of them.
1. Space, and Emptiness. In Taoist thought, emptiness is more important the the physical objects. Because without emptiness movement, breathing, life, change, etc... would not be possible. It is the emptiness that defines the phsyical objects shape. And within this emptiness, chi and Tao are found. This concept shows itself in chinese art, and culture. Take for instance Chinese Brush Paintings. It is the empty white space that is used to define the objects. Without the empty space, the painting would have no meaning.
2. Chi-Gong. Chi-Gong is an ancient chinese form of energy work and exercise based on the working of chi. It follows "Meridians" that run almost parallel to the nervous system. It embodies exercises and healing methods that enhance, unblock, and align these meridians. It also involves meditative practice that helps one become aware of the flow of chi, and to find the blockages and such.
3. Martial Arts. Almost all systems of asian martial arts deal with chi in some way. Even korean and japanese arts do as well, but the word for "chi" in their language is "Ki." In Martial Arts, Chi is embodied as breath. It is attuned with breathing exercises during techniques, and enhanced with screaming (or in korean: Ki Hap). This is how martial artists get all of their power.

The Shaolin and Taoist Tai Chi Chuan masters demonstrate feats of power with their use of Chi. Such as bending spears with the sharp tips in their necks, laying bareback on broken glass while having cinder blocks smashed with a sledgehammer over their stomachs, performing 1 finger handstands, and the all too familiar breaking of boards.
In conclusion, Chi is the lifeforce of the universe. It is the spirit that causes the heart to beat, the synapses to fire, and life to exist. But it is also the energy that causes rivers to flow, the sun to burn, gravity to magnetize, and gives us the ability to breathe, move, and exist.