the tank holds cooling liquid and there is a pump attached to this. the pump pushes water through rubber tubings to specially mounted "heatsinks" on the cpu and gpu and such...it goes in one end of the "heatsink" and out the other taking the heat away with it. the water travels from cpu to gpu and to hard drives and then back to the cooling tank again where it just keeps getting cycled...im pretty sure that it is not water used, but a liquid with an increased thermal dynamic properties that absorbs heat quicker. hope this helps

What he said.

I'd recommend not using watercooling systems:
>"Hey, what's that sound?"
>"It's coming from your computer."
>"Oh, !@#$!!! The watercooling hose sprung a leak!"
>*sizzle* *zap* *pop* *sizzle*
>"I think you need a new motherboard..."

It actually is water. You want to put a special solution in the water, though, to keep various "grungies" like bacteria, algae, and mold from forming in the lines. I think there are solutions that help increase thermal dissipation, but I'm pretty sure that you still mix them with water to some degree.