To activate Spaces, go to System Preferences > Exposé and Spaces > Spaces. From there you can enable from 2-16 "spaces" (virtual screens) and you can fine-tune application behaviors. For example, I have Skitch set to appear in Every Space, which simply means it'll appear in whatever space I happen to be working in when I open Skitch. Normally switching to an application will take you back to the space you left it in (you can turn this off in the preferences).
The really awesome thing about Spaces: it's like Exposé on steroids. If you're used to hitting a key and seeing all open windows, now you'll be able to hit a key and see all windows in all the Spaces you have open -- thus expanding your screen real estate considerably. Plus, you can use the two together. Hit a key to see all Spaces, then hit your Exposé key to see all the windows in every Space. You can also easily drag windows to another space either in the zoomed out view or just by pulling a window to the edge of the screen (depending on which space you wish to travel to). It's hard to explain, so watch the video to see what I mean.
Note that there are some apps (Microsoft Word 2008 in particular) that don't play well with Spaces, so your mileage may vary.
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