From the Wikipedia article:
Lolcats are images combining photographs of a cat with a humorous and idiosyncratic caption, said to have its origins in the 4chan imageboards as the Caturday phenomenon. The name “lolcat” is a compound word formed from lol and cat. The phenomenon is also referred to as cat macros. Lolcats are created for photo sharing imageboards and other internet forums. Lolcats are similar to other anthropomorphic animal-based image macros such as the O RLY? owl, but the cuteness of cats “enhances” the appeal and increasing prominence of the Internet meme.
Understand that? No? Then let me explain…
Take a funny cat picture, put a witty caption on it using “Internet lingo,” and put it on the web. Viola…lolcat.
Go to ICanHazCheezeburger.com to see what I’m talking about. I’m addicted to the stupid things. Some of the humor might go over the heads of people who haven’t been to Internet message boards over the past few years, but they’re still funny.