My limited understanding is that it works like:
bits (0's and 1's) -> encoding (e.g. UTF-8) -> glyphs (e.g. Unicode) -> Some insanely complicated black box. This black box knows how to do all sorts of things like kerning, combining cháracters, bizarre punctuation,and other magic.
I understand UTF-8 and Unicode, but I have no idea how all the other magic works. Why is AV nicely kerned, and 我. nicely spaced? Apparenty this is a really hard problem because my trusty old code editor Textmate didn't get it right. Unicode to screen is a terribly hard problem.