Re: how it works?
I've never bothered to work out the physics of what's going on in the lens system, but I think it's similar to how a tilt-shift camera lens affects what you see in the viewfinder of a camera. Basically, if you shift the lens up, it shifts the image up; shift it right, and the image shifts to the right; etc. If you have a basic SLR camera, you can take the lens off, hold it just in front of the camera, and move it side to side or up and down to see the effect.
All the knobs really do is turn some screws. Those screws push on the erector tube, which houses the lenses that erect the image from the objective lens. Springs mounted on the opposite side keep the erector assembly bearing against these screws. By moving the erector tube around inside the main body of the scope, you can effectively change where the scope is looking, and what the crosshairs are pointed at.
If you dial "up" elevation, the goal is to point the barrel higher with respect to what you're aiming at. To do this, the image you see through the scope needs to be shifted down. Since the image formed by the objective lens is an inverted image, moving the erector tube up will actually be looking lower in that image. This means that the erected image will also be shifted down. When you bring the crosshairs back up to the target, your barrel will now be pointing higher than before.
It's the same thing for windage; move the erector tube to the right, and it will be looking to the "left" in the inverted image. When you aim at the target, your barrel will now be pointed more to the right.
For a typical US scope, which adjusts counter-clockwise for "up" and "right", you can pretty much view the knobs as typical right hand thread screws that you turn into or out of the scope. They push the erector tube around directly, causing the image you see in the eyepiece to shift around accordingly. This changes the relationship between what the crosshairs are pointed at and where the barrel is pointing, allowing you to move the bullet impact as desired.
Hopefully that was somewhat clear. I'm not the best at explaining things sometimes, and I'm a bit tired right now.