Brad Abrams, Lead Program Manager for the CLR Team, provides a great technical answer to this frequently asked question.

What is Managed Code?

Managed code is code that has its execution managed by the .NET Framework Common Language Runtime. It refers to a contract of cooperation between natively executing code and the runtime. This contract specifies that at any point of execution, the runtime may stop an executing CPU and retrieve information specific to the current CPU instruction address. Information that must be query-able generally pertains to runtime state, such as register or stack memory contents.