Hamon are temper patterns at the edge of Japanese swords. They are formed during the cooling of the blade. Essentially, the swordsmith applies layers of clay to the hot metal blade before submerging the blade in cold water. The clay is applied in patterns and is of varying thickness, so that the blade cools differentially. This difference in the cooling time creates patterns of light and dark in the metal. The hamon are created on the cutting edge of the blade, so that the cutting edge is lighter in color than the back edge of the blade.
Some standard patterns for hamon are straight (sugu), zigzag (gunome), wave (notare), clover-tree flower (choji), three cedars (sanbonsugi), billowing (toran), pointed (togari), bamboo strip curtain (sudare), irregular (midare), and notched (yahazu). There are other possibilities as well, among them some complex designs such as chrysanthemum on water (kikusui) and mixed designs which incorporate two of the standard patterns.
The hamon also display various "activities" or "workings" (hataraki in Japanese). These marks are various streaks, dots, and patches that result from interactions in the steel during the cooling process. Given a proper polish, a sword of high quality should show a hamon of "high activity", i.e., with plenty of these marks. Generally, more of these marks indicates a higher quality of steel.
Source: http://home.earthlink.net/~steinrl/terms/terms.htm