its pretty simple.
Its a piece of software (or hardware in some cases) that records the keystrokes made on the computer its installed on. Sometimes these programs have the option to 'record' screenshots every X amount of time, and/or email the recorded logs to a particular address.
Ideally, the program runs at startup and is as covert as possible... that is to say you shouldnt see a process called "keylogger" running or somthing like that.
They are often used legitimatly to monitor children, employees, students, etc. They are also sometimes bundled with other applications or something like that and installed on a victims machine without their knowledge, passing sensitive information out. In this way, email logins are often prized as they have the option of the good old "I forgot my password" option on sites such as Amazon, Ebay, ****, and other service logins.

That about covers it I think.
Hope that helps.