A Sparse Bundle is an intelligent disk image, created by Mac OS X Leopard, that is capable of growing and/or shrinking as needed. For example, a 60 GB .sparsebundle containing only a 5 MB file would not be 60 GB - it would just be 5 MB. These files are used in both FileVault and Time Machine under OS X Leopard.

It's worth noting that a .sparsebundle file is made up of 8 MB 'bands.' These bands are updated, deleted, or modified as needed by the OS feature in question.