Basically, they work just like a fridge. There is a compressor that cools the water which flows through the tubes. Instead of air flowing over the heat sinks, the liquid is used to draw the heat from from the parts.

-- Andy

I had one (still have it, actually, collecting dust in the corner) and it worked fine. I think checked the level about every 6 months, and added just a little bit of coolant about once per year. That said, it was kinda overkill (and the one I had could get loud, especially during the summer when the room would be hot) so I've gone back to fans.