Día de los muertos, or the Day of the Dead, is a Mexican holiday that falls on November 1st and 2nd and coincides with the Catholic All Saints Day and All Souls Day. The celebration may be Christian on the surface, but its origins lie in ancient Zapotec and Maya rituals of ancestor worship.
Day of the Dead celebrations are popular not only in Mexico but also with Mexican immigrants in the United States. In recent years the holiday has been increasingly adopted by the American Anglo population, for whom it coincides nicely with Halloween. Similar festivities are celebrated in various forms in other Latin American countries and overseas.
Contrary to expectations, día de los muertos celebrations are by no means somber affairs. Observations center around the commemoration of departed loved ones, with the first day devoted to infants and children and the second day to adults. Families visit graves or build altars in the home which they decorate with pictures of the deceased, candles, marigolds and food offerings. Happy stories are told about those who have passed on.
Some of the more popular food offerings are pan de muerto, sugar candy skulls (calaveras de azúcar) and beverages like atoles and tequila.
Here is a good site to read about calaveras de azúcar (Mexican sugar skulls). It's got great instructions for making your own!