They are very popular where I live bordering Mexico. The belief is that on October 31, the gates of heaven are opened at midnight and the spirits of all deceased children (angelitos) are allowed to reunite with their families for 24 hours. On November 2, the spirits of the adults come down to enjoy the festivities that are prepared for them. Sugar skulls represent a departed soul and are placed on the home ofrenda or gravestone to honor the return of a particular spirit. They are made from sugar in a traditional folk art style.
http://www.mexicansugarskull.com/ Here is a wonderful site with the history and information on Day of the Dead and Sugar Skulls.
