The folks over at the E2 team have prepared a great whitepaper titled "Outlook Synchronization in Microsoft Dynamics CRM Explained" describing the client synchronization process that is associated with Update Rollup 7 for Microsoft Dynamics CRM 4.0 or later (for on-premise deployments) and with Microsoft Dynamics CRM Online November 2009 Service Update or later (for online deployments).
In it, they cover the following items:
Overview of Dynamics CRM Client Synchronization
Microsoft Dynamics CRM 4.0 uses two processes to manage replication of information between the central Microsoft Dynamics CRM database and the local data store on a computer running Microsoft Dynamics CRM for Microsoft Office Outlook with Offline Access (the "offline client").
Outlook Synchronization
Both the online and offline versions of the CRM Outlook Client support synchronizing CRM contacts and CRM activities to Outlook folders, or Outlook synchronization. Outlook synchronization enables Outlook users to view Dynamics CRM information, including contacts, tasks, phone calls, letters, faxes, appointments, and e-mails, within the Outlook interface.
Online/Offline Synchronization
The online and offline synchronization process manages replication of data back and forth between the Microsoft Dynamics CRM database and the local database on a computer running the offline client.
The offline synchronization (GoOffline) process manages replication of information from the Microsoft Dynamics CRM database to the offline client. On the other hand, the online synchronization (GoOnline) process, manages replication of changes in the local data store from the offline client to the Microsoft Dynamics CRM database when the offline client reconnects to the network.
The entire whitepaper can be downloaded here