How do DNS-based proxy services work (e.g. to watch the BBC olympic feed)?

I have a British wife who was being driven crazy by the US Olympic coverage. Following the suggestions on

http://news.ycombinator.com/item?id=4306600

I used the free trial of www.unotelly.com. It worked like a charm. I pointed my DNS to one of their servers, and I could see the BBC live Olympics streams. I get that they make my computer appear to be in the UK, but how do they do that? It seems like a big improvement over the older VPN services. What's going on under the hood? Any security concerns from a service like this?