BSP (Binary Space Partitioning) is a method of dividing space into convex sub-sets of space. The technique is used in many areas of computer science and 3D. It is also used in the Source Game Engine's level compilers to help optimize game levels. Levels in Source and Goldsource are dependent on BSP, and compiled levels are always saved with a file extension of ".bsp".
In terms of Source, levels in VMF file format (created in 3ds Max or Hammer) are sent to a tool called vbsp.exe where the level is converted into a BSP file.