How does a Camera Obscura work?

Answer 1

Try this site:
http://en.wikipedia.org/wiki/Camera_obscura

It explains it a lot better than I can.

Answer 2

Basically, it's nothing more than a giant pinhole camera large enough for an artist to sit in and view the image projected on the screen. In the middle ages, artists would sit inside them and trace the images on paper. I've often wondered if that is how artists first learned to control the illusion of perspective on a 2 dimensional image.