To accomplish this bit of wizardry, ScreenRecycler uses VNC (a cross-platform app for remotely controlling another computer - I personally like Chicken of the VNC, but there are other clients you can try) to connect to the old machine. What's cool about this and really sets it apart from your basic VNC setup, is that ScreenRecycler makes your Mac actually recognize the connected machine as another display, so it can be configured through System Prefs just like any other external monitor. It's not exactly pretty and it's not exactly speedy, but it is really pretty cool, if you ask me.
ScreenRecycler is currently in pre-release Alpha but can be downloaded for free. It's still got some "issues" so please be sure to read the caveats posted there before you download it. If you get it working, let us know what you think!