This is a simple technique used for page load performance purposes. Since HTTP requests are the most expensive thing you can do in regards to front-end performance, you strive for making as little requests as possible. So instead of having the browser download 4 rounded corner images for example, you create one image that has all four. Then you use CSS' background-position to only show the part of the image you want.

He explains briefly how the system works and includes a simple example in PHP (showing how to use the imagemagik utility to create the custom image).