A shader is some kind of programable texture. This way you can add various special effects to a sureface/texture.
For examble you can 'program' a texture to move in u or v direction to create a 'flow effect' on the model.
Another examble is to blend and overlap two textures using a timeintervall to create glowing stuff (like deamon eyes etc.)
This is just a small list, using shaders 'the right way' you can create stunning effects without wasting polys.
Another great feature of the UT2K3 shader effects are multi layered textures in order to create seamless and detailed surfaces (for examble the grass texture which consist of around 6 seperate textures which are blended into each other)