Darkvision is the extraordinary ability to see with no light source at all, out to a range specified for the creature.
Darkvision is black and white only (colours can not be discerned). It does not allow characters to see anything that they could not see otherwise, invisible objects are still invisible, and illusions are still visible as to what they seem to be. Likewise, darkvision subjects a creature to gaze attacks normally.
The presence of light does not spoil darkvision. If a character has darkvision with a 60 ft. range, and they stand within a 20 ft. radius of light, the character can see normally in the light, and 40 ft. beyond the light because of their darkvision.
Based on the entry in Dungeon Master's Guide 3.5 Page 292.