Your homepage is generally the highest PR page of your site. (Usually, not always, but usually.)
Every link on your homepage, whether it’s to an external page or an internal page, passes a certain amount of PR to the pages it links to.
The more links you have, the less PR each link passes.
The theory is that you want to pass as much PR as possible to your internal pages, so they do well in the rankings, and because they pass a certain amount of PR back to the homepage as well.
Imagine it as a bunch of soldiers. (I think Classics used this metaphor.) If you have 1000 soldiers (PR), and you have 10 links on your page, you’re sending 100 soldiers to each of those links. If 5 of those links are to someone else’s page, then you’ve only got 500 soldiers left for your own pages.
That’s a massive over-simplification, I know, and Classics usually does a better job than I do of explaining it, but I hope it’s helpful.
Webmaster World’s Link Development Forum is a good place to get more info too.
Hope that helps!