In Character (IC) is when a player is playing/acting/talking from his/her character's point of view.
In character interaction is the core purpose of roleplaying but the term "in character" and the abbreviation "IC" are generally and most commonly used to refer to speech emerging from a character through his/her view point.
In character speech is regulated by the RP Realm Policy, which clearly states that all communication in /say, /yell and /party chat is to be in character at all times.
Unfortunately for these rules, party chat is most often used as out of character chat for obvious reasons (see OOC). Fortunately for the players using it so, game masters do not actively police this chat for violations.