It only works with iMessages. You're right though: SMS functionality (somehow) would be pretty awesome.
Not only awesome, it's the only reason why I would want to use this. Lets say I hear my iPhone buzzing in my backpack. I know I have my iMessages synched to my mac. Now the guessing game begins - should I pick the iPhone or wait until it has been synched? How long should I wait? Nevermind, what was I doing right now?
Absolutely useless, unless you have started some kind of Apple religion and all your contacts have iPhones.
It's been announced for iOS 6 that you can register your phone number under your Apple ID so that phone-number iMessages will appear on your Macs and iPads.