Hi Ray,
If you go to the Compass site you can see an overview. You are right that Sass is a ruby gem. Compass works with Sass by "listening" to changes to files in a specified directory. Anytime a change occurs, the Sass file automatically updates any corresponding CSS file. Basically, it makes it so you don't have to do any manual generation of CSS from the Sass source files.

There's a nice screencast here: http://wiki.github.com/chriseppstein/compass/

Mark