(Henri de Toulouse-Lautrec (French, 1864-1901), Au Moulin-Rouge, 1892, color lithograph, second state, 17 7/8 x 13 1/2 inches (45.4 x 34.3 cm), Cincinnati Art Museum, OH.)

Howstuffworks has a great article detailing how stone lithography is done.

The basic idea used in stone lithography is extremely simple:

1. The artist draws/paints on the stone with a greasy substance. For example, a litho crayon is a soft waxy/greasy crayon. There are also litho paints and pencils. The stone picks up this greasy substance and holds it.
2. The stone is moistened with water. The parts of the stone not protected by the greasy paint soak up the water.
3. Oil-based ink is rolled onto the stone. The greasy parts of the stone pick up the ink, while the wet parts do not.
4. A piece of paper is pressed onto the stone, and the ink transfers from the stone to the paper.

Arlex.com has a great collection of examples of art on lithorgraphy.