It works like regular Netflix, but with the added option of streaming SOME movies to your xbox directly. Not all of their movies are available to stream, but you can check their website and see which ones are available (they will have an option to "add to your instant queue").
Along with streaming, you can just order DVD's from the website by mail, then return them whenever you are done. There are a bunch of different subscription levels, the cheapest one only gives you 2 hours of streaming per month, but any level besides that one gives you unlimited streaming. I think the cheapest unlimited streaming one is like 7 bucks or something.
Basically it's like Blockbuster, but instead of going to the store you just send it back to them and they send the next one you have on your list.