The basic idea of CSS Sprites is to combine a number of images used on your site into a single image, thus reducing the number of HTTP requests that need to be made to your site. The image is rendered using a CSS background and background-position (which, incidentally, means that your markup becomes more complex; the image to use is specified in CSS, not in a plain tag).
The biggest problem with CSS sprites is memory usage. Unless the sprite image is carefully constructed, you end up with incredible amounts of wasted space…