
Xenical prevents a percentage of fat consumed from being absorbed by the body, so it is passed as waste. When taking it, you must restrict your fat intake to no more than 15g in any one meal (all food should be less than 5% fat in total). In eating a low fat diet, a person will naturally lose wight and the Xenical increases the weight loss - for example, if a person would naturally lose 2lbs a week through dieting alone, then Xenical could help them to increase that to 3-4lbs a week just by taking the tablet along with their restricted diet.
However, if a person consumes more than the recommended amount of fat, the tablets cause hideous side effects as alluded to above (chronic diahorrea, uncontrollable leakage etc). If they consume no fat at all, the tablets have nothing to bind to and therefore are ineffective.
I guess it works because it's like a gun to the head - do I really want this piece of chocolate if it means I'll be on the toilet for the rest of the day (or worse!)??
They seem to work extremely well for some people, as long as they can be disciplined about sticking to the rules. Although, as has already been pointed out, if you can be discilpined about sticking to a low fat diet, then you will lose weight anyway - just a little bit more slowly than with Xenical.