The Cateye works by placing a small magnet on one of your wheel's spokes and a corresponding unit that reads the passing magnets rpms and transmits the data to the display unit. Its just a cool little device that makes keeping track of your cycling millage a little easier.
On another bike-tech note, here is a good article from Wired's gadget blog about a neon setup for bicycles. A cool idea for those that want a little flash to go along with their bikes, and an alternative to ordinary bicycle lights for those that ride at night. The only question I have is... how long would one of these last before it was stolen or broken by somebody?