time essentially moaning that love is hate, right is left, and up is down, as he is so topsy-turvy in love (and not loved back) that he doesn't know what to think or do. Eventually, Benvolio gets him to explain what the problem is.

Romeo admits that he's sad about a woman, to which Benvolio responds that he kinda figured that ("I aim'd so near, when I supposed you loved"). Romeo then admits that:

...she'll not be hit
With Cupid's arrow; she hath Dian's wit;
And, in strong proof of chastity well arm'd,
From love's weak childish bow she lives unharm'd.
She will not stay the siege of loving terms,
Nor bide the encounter of assailing eyes,
Nor ope her lap to saint-seducing gold:
O, she is rich in beauty, only poor,
That when she dies with beauty dies her store.

That is, "She is impervious to anything I do to make her love me. She is determined to remain chaste. No matter how much I tell her I love her (or flatter her), or look at her with puppy dog eyes, she is unmoved. She is incredibly beautiful, but it doesn't matter, because she's determined to die a virgin." 

Benvolio breaks it down, too: "Then she hath sworn that she will still live chaste?"

This is where your line comes in. Romeo replies:

She hath, and in that sparing makes huge waste,
For beauty starved with her severityCuts beauty off from all posterity.
She is too fair, too wise, wisely too fair,
To merit bliss by making me despair:
She hath forsworn to love, and in that vow
Do I live dead that live to tell it now.

Translation: She has sworn to "live chaste"--to not be romanced or even kissed. She has sworn to be spare--to not be with a man--and that is such a waste. Because beauty which is so severe as to starve itself of such (ahem) affection cuts the family line (she won't have any children, which is also a shame, because they would be beautiful, as well). Rosaline has chosen to "merit bliss by making [Romeo] despair." I assume she has chosen to become a nun.