generally the sweet spot refers to the middle of your listening area. the idea is that the middle gives you the best area to hear all your speakers. if you're too close to the left/right, then you could (possibly) "miss out" on some sound.
finding a sweet spot is pretty tough to do because all rooms are different. if you can put yourself in the middle of your sound, then i'd say you're there.
check out this dolby.com article for some good info on speaker placement.
The sweet spot in the seating spot where all the speakers are pointing and is directly in front of the screen. This is usually the place where the speakers are SPL and distance calibrated from, so all speaker output is at the correct volume and arrives at the same time. Go away from the sweet spot and the speakers you move closer to sound louder and the ones you move away from sound softer and the sounds may arrive at your ear slightly delayed. The effect is not extreme for short distances, but it is there, hence the term "sweet spot". For placement, see Dolby's website for starters. Also try a search on this site, there are numerous threads on placement for traditional and non-traditional shaped rooms.
The traditional sweet spot is setup for 2-channel listening, and this is where sitting centered properly, with your speakers exactly equidistant, and symmetrical in the room is very important. 5.1 is designed with the center so that you don't need to be in the sweetspot for good performance. Sitting off-center is ok, since it is intended to have more than just one listener in the sweetspot listening. Moving to the side with a stereo setup totally obliterates your imaging, but doing so with a 5.1 is not so much the case because the dialogue and such are heavily anchored by the center channel. Still, the sweet-spot is the best place to listen.