What LDBoblo said...
It's pretty much a standard LCD display (except that each pixel is limited to a single RGB color and has to work in concert with adjacent pixels to create the desired specific colors) and a reflective layer is inserted between the display and the backlight so that ambient light can be used to see the display, rather than relying on a powered backlight. The colors come from a filter layer between the backlight and the reflector, so you've only got a grayscale display with the backlight turned off. But, since the backlight consumes the lion's share of power used by most portable devices, you get dramatically improved battery life without it. And, the screen is perfectly readable outdoors, even under direct sunlight.
In my experience with the older version of the Pixel Qi technology used in the OLPC XO, it's not quite as good as a normal LCD for color usage and it's not quite as good as e-ink with the backlight off, but you do get 95% of the virtue of both display-types consolidated into a single device. That's hard to argue against and it's even harder to give up once you've lived with it for a while.
The information at this link is for the OLPC display, but some of it is still relevant for the newer Pixel Qi displays: