How does it work and what are the benefits?

You'll need a video card with support for multiple monitors, or you can add an additional video card to the system and connect the additional monitor(s) to that. The desktop then gets extended across all monitors, and you can move the mouse and applications freely between monitors, run different applications on each monitor, or stretch a single application across two or more monitors.

Multiple monitors make it easier to work with several applications at once, you could write a document on one monitor, and review reference information on another. Or stretch a large spreadsheet across multiple monitors to see all columns at once. Multiple monitors are also very useful for applications with lots of toolbars, for example image editors, you can move the toolbars to a secondary monitor to get more space for the image you're editing on the primary monitor.

Below are a couple of screenshots from a Windows 7 system with two monitors:

Desktop extended across 2 monitors. Monitor 1 is the primary monitor, with the taskbar and start menu

A different application on each monitor

A single application stretched across both monitors

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