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.
Now don't imagine you're going to watch video over Wi-Fi using this kind of connection. The best use cases involve slower apps like instant messaging, Twitter clients, or even Photoshop.
According to Shape Services Head of Development Alex Makarov, iDisplay grew out of an in-house idea. "All of us have two or more monitors on our systems at our workplace. It was natural to make an external monitor out of our iPhone devices." Makarov pointed out that external hardware monitors represent a significant investment compared to using a spare iPad or iPhone, plus these devices are highly portable, adding extra screen space on-the-go.
My iPad should arrive tomorrow. I'm betting that on Sunday, I'll find some excuse to head out to Starbucks with my Hackintosh and my iPad to test out the software in the real wild. iDisplay has an introductory price of $4.99.
Update: I've got the extension installed (requires reboot) and it running with an iPod touch. It's both really cool and clearly closer to alpha than a beta product. I love that I can take my Mac applications (if they are on the correct screen) with me across the house. Stability? Not so much. So use with care. Still can't wait to use it on a larger screen.