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It means you do not have to pay to use the work.
It does NOT mean you can use it without payment - it means you don't have to pay royalties, or recurrent payments. So you pay one fee to use an image/some software/whatever, and no further fees for reuse within the terms of the license.
There can be many different licenses and sets of terms associated with royalty free images/software/whatever, so you need to check the specific terms in each case.
Generally speaking though (and it's very general) when you purchase or acquire royalty free rights, you can use the item without recurrent charges, but you cannot create derivative works for resale, nor can you redistribute the item.
So, for example, you could use an image ro which you have acquired royalty free rights in the creation of a website, but not in creation of website templates for resale. Nor could you make the image available for other people to use. Copyright remains entirely with the original owner at all times.
Do make sure that you check the licensing agreement before buying: there shouldn't be any creative restrictions. If there are, find another source.
Photo libraries are becoming increasingly cheeky/grasping in recent times, so it's best to be thorough. I had dealings with a well known photo library earlier this year that actually had the audacity to try and sell me me single use Royalty Free images. I kid you not!
[edited by: Syzygy at 6:03 pm (utc) on Aug. 18, 2007]