Litecoin is a cryptographic "currency" rather like bitcoin.
To make the currency secure, every transaction is broadcast publicly, and then digitally signed by "miners" using a very complex algorithm, which is used as "proof of work". A transaction can be regarded as valid once a certain number of "miners" have verified it and signed it off.
Because mining is very CPU intensive, there is a small reward to miners in that new coins are spawned into the miner's accounts. In addition, when transmitting coins between wallets, a small transaction fee can be charged, and the miners that process the transaction can take a cut of it.
In general, GPUs can be used for much greater efficiency over CPUs, with AMD cards massively better than nVidia cards.
Yes, it is profitable at the moment. A 7950 card can generate about 0.2 litecoins in 24 hours, while consuming about 6 kWh of electricity. 0.2 litecoins can be sold for about $5, whereas 6 kWh of electricity costs about $1.
There are people buying hundreds of cards (I've heard of someone buying 200 radeon 290x cards last week) to mine with.
There are major risks to profitability. The mining "difficulty" auto adjusts according to how much CPU power miners have, so that the coin spawn rate stays constant. If the total amount of CPU power dedicated to mining doubles, then the difficulty doubles and the rewards gets cut in half.
Right now, the litecoin mining CPU power is going up like mad. It's pretty much doubled in the last 10 days, and the rate of increase is getting steeper.
The price of litecoins also fluctuates like crazy - over the last week, they have fluctuated between $16 and $51, spending most of the time in the mid 30s, and are no about $26.