I haven't had a chance to play with it yet (I already downloaded the software but haven't received my iPad) but I am so looking forward to using it. It works like this: you install an extension on your OS X desktop system. (A Windows version is in the works, as well.) That extension looks like a monitor to the underlying operating system, which begins to send data through the extension to any attached device. The data is sent over Wi-Fi to the iPad (or iPhone, if you're using an iPhone, as it's a universal application), which acts as an extra monitor.
It's not just a one-way connection. The on-device keyboard generates shared events for OS X, and the screen allows you to treat your second monitor as a multi-touch input device.