Audience Identification means the people watching a television
program feel like they have a connection
with the characters (and hopefully will watch the show again).
One example might be Dr. Crusher from Star Trek: The Next Generation - a single mother and career woman. "Wow," says the average working single mother (who is for some reason watching Star Trek) "She's like me, so I better watch more of this show!" and her brain gets sucked out of her head by shameless target marketing. Actually, as much as it pains me to say so, it wouldn't be such a bad thing in this case - Star Trek isn't that bad.
Remember, this is primarily used to make people watch a show, so there's going to be times when it's used in a shameless manner (If you're cynical like me you will say that covers every time it's used). While the occasional moment of "Heh, yeah, I so understand that character" isn't a bad thing it becomes a bit of a drag when characters added to a show have been scrutinised in scripting not for the dramatic potential but for the potential demographic they will bring due to audience identification - or the comfort they will provide to the existing audience by making them feel the show relates to their life. This last case is also a defensive action to avoid losing an audience - One thing that springs to mind was sitcoms spawning lesbian characters as a defense against Ellen DeGeneres' show grabbing up chunks of their audience.
The drive for audience identification can make storylines suffer. For Doctor Who - originally targetted at a "young adult" audience - it was decided they needed a teenage girl as a regular character. When the actress left they added a new character, and when the new character was written out the hasty replacement was a girl from ancient Greece. This offered up some interesting possibilities for character development and social commentary, but it was felt that the audience could not identify with her, so she was killed off. Her replacement was an Emma Peel clone, but was also written out because the production team just couldn't see people identifying with the character. Next up was the same carbon copy character that had gone before, which didn't leave the scripts many places to go.
It's probably neccessary to have a lot of audience identification in a comedy series. Comedy tends to rely on recognising a situation - Would Seinfeld be as funny if you didn't recognise any of the character traits in the core group as being part of you? Well okay, maybe "close to the way you behave" is better in that case... But you get the idea, it's hard to make people laugh at the way people behave if they aren't able to equate it to their everyday life. It's not always a bad thing to identify with a character or a situation, it means you're actually paying attention to something and not staring at it saying "TV good. Man fall down. Ha. Ha." You should be worried when you realise that every little facet of a character is so YOU because it means either 1: There are secret cameras in your house, or B: You're a really, really stereotypical person (you just have to accept this, sorry).
It's a lot more ruthless when the show involved is a drama. If you feel so inclined, sit down next time you hear about This Fall's Hot New Drama and see how many of the characters exhibit traits from Stereotype A though to Stereotype Z. If there isn't a teenage character facing the trials of growing up then the network heads must have been feeling particularly moralistic - if one turns up in later episodes then you know they want a slice of that pie. You'll know for sure if there's a character that seems out of place for this type of show that they're in there for audience identification.