We’ve had a lot of questions on this. The basics of it are pretty simple actually:
MeowBit relies on the NameCoin wallet resolve .bit domain names. A simple local DNS-bridge against the local blockchain data.
Under Windows 7 the DNS servers are replaced (and stored) when the system is enabled. On Window 8 the DNScache function allows for specific TLDs to be resolved by specified name servers, so the functionality is a lot cleaner.
The goal is ease of use for the end user, to be able to resolve .bit domains without having to trust a third party.