A sprite is a two-dimensional (2D) image. Sprites are used in games to collectively create a scene. Each sprite is used to represent each object. A "Sprite Sheet" is simply a collection of still images that progress. Once displayed sequentially it creates animation.
Although sprites are usually used in referring to two-dimensional games, or pseudo-3D sprite-scaling (such as Super Scaler, Mode 7 and Ray Casting), they can and have been used in three-dimensional games. The way that they are typically used within 3D games is through rendering or imitating a rendered frame from certain perspectives. This removes the computational overhead of rendering each position dynamically. Sprites are also often used in 3D games today to display grass and foliage, in the form of billboarding. Sprites can also be used in conjunction with cel-shading.
The use of read-only memory in arcade games from around 1974 allowed the use of sprites. Taito released the earliest known video games with sprites that year, including Basketball, a sports game that represented four basketball players and two baskets as sprite images.
Speed Race, which ran on Taito Discrete Logic hardware in 1974, featured sprites with collision detection moving along a vertical scrolling playfield (see Bill Loguidice & Matt Barton, Vintage games: an insider look at the history of Grand Theft Auto, Super Mario, and the most influential games of all time, page 197, 2009). The Fujitsu MB14241 was used to accelerate the drawing of sprite graphics for various 1970s arcade games from Taito and Midway, such as Gun Fight (1975), Sea Wolf (1976) and Space Invaders (1978). It could display up to 11 sprites per scanline (see references here, here, here, here, here, here and here).
In 1977, the Taito Z80 arcade system board used for Super Speed Race was capable of generating up to 16 sprites in hardware and display 4 sprites per scanline. Each sprite could have a size up to 32 pixels in width or height and display up to 15 colors (see references here, here and here).
In 1979, the Namco Galaxian arcade system used specialized graphics hardware supporting RGB color, multi-colored sprites and tilemap backgrounds. It could display up to 64 hardware sprites on screen and 16 per scanline. Each sprite could be up to 16x16 pixels in size, with 3 colors each. The Galaxian hardware was widely used during the golden age of arcade video games, by game companies such as Namco, Centuri,Gremlin, Irem, Konami, Midway, Nichibutsu, Sega and Taito (see references here and here).
In the 1980s, sprite-scaling became a popular technique in arcade games to represent a three-dimensional perspective using 2D sprite graphics, i.e. pseudo-3D. Sega in particular was at the forefront of sprite-scaling graphics with its powerful custom Super Scaler graphics boards, which could quickly scale and rotate many large colourful sprites at high frame rates.