Commonly known as .htaccess, AllowOverride is a neat little feature that allows you to tweak the server’s behavior without modifying the configuration file or restarting the server.  Personally, I think this is great for development purposes.  It allows you to quickly test various server configurations without needing to mess with restarting the server.  It helps you be more (buzzword alert!) agile.
Beyond the obvious security problems of allowing configuration modifications in a public document root there is also a performance impact.  What happens with AllowOverride is that Apache will do an open() call on each parent directory from the requested file onward.