An Acronym for Fear, Uncertainty, Doubt.
It is a marketing tactic used against superior competitors in a weaker market position, such as by telling your customers that the competition is inferior, that the next version of your product that will be released tomorrow will have all the same features and more, that the competitor won't be around in 6 months, and other half- and blatant untruths more. The goal is to make people insecure about your competitor and give them the feeling that betting on you is the safe option. The first company to employ FUD was IBM; Amdahl is credited with coining the phrase after he left IBM to start his own company. Funny how times change.
A good example of is MicrosoftCorporation's recent document called CompetitiveComparisons, and their recent "Get the facts" campaign. Other examples that try to discredit Linux are listed on the MicrosoftQuotes page.
See also: LinuxFudDispelled
Digital Research launched their DR-DOS, which was better and cheaper than MS-DOS 5 and received favourable reviews all around. Microsoft reacted by putting out a pre-release of Windows 3.1 that produced an inconsequential warning message when run under DR-DOS which came to be known as 
the AARD code. They also announced that MS-DOS 6 would do all that DR-DOS could and more. In reality, MS-DOS 6 was vapourware at the time. The rumour spread that you'd have problems running Windows on DR-DOS, even though it wasn't true at all. It is questionable whether the MS-DOS 6 that eventually materialized was better than DR-DOS, but Microsoft designed a dealer package that made it more expensive not to bundle Windows with MS-DOS, and left DR-DOS dead in the water. This is believed to be the making of the Microsoft monopoly.
AMSTRAD was a UK consumer electronics manufacturer whose product design rationalization allowed them to sell decent electronics at rock-bottom prices. When they decided to launch a range of home consumer PCs, they found a 35W PSU to be sufficient even with a HardDisk and tape streamer attached (low end PCs of the time usually came with twin floppy drives), so they decided to power the entire system from the upgraded monitor PSU. Since there was no PSU in the computer case and its electronics only dissipated about 20W, AMSTRAD PCs required no fan in the case and so were quieter. They were a great success -- so great that they began to find their way into offices where equivalent 'traditional' models typically cost 50-100% more and made a lot of noise. The FUD spread: "The AMSTRAD has no cooling fan! With a hard disk it'll melt! Your crashes are because your AMSTRAD is overheating!" These rumours were easily refuted, as AMSTRADs worked well and would remain cool after a day's worth of use, but they scared new customers because AMSTRAD PCs had no fan when all others did. So in the end AMSTRAD fitted a useless fan in the back of the case and everybody was happy. People in the know cut the wires to the fan and never had any problems, but the majority just accepted the constant fan noise as a necessity.
