On the same principals as a refrigerator but split into two parts. The indoor unit acting like the cold plate inside a fridge and the outdoor unit acting like the warm pipes on the back. Heat is transferred between the two units using a compressor to circulate refrigerant.

Air conditioning units transfer heat between the two units and you pay for the electricity used to do this. Typical values in cooling are 3 to 1 which means you can transfer 3 kilowatts of heat with 1 kilowatt of electricity. In heating, typical values are even better 4 to 1. (Electricity is around 8.5 pence per kilowatt depending on your supplier).

No. The air in your room is recirculated through the indoor unit where it passes through a heat exchanger / coil that heats or cools the air.

Yes. There are a number of different ways of doing this but they have to be designed into the system from the start.

This is the description given to a system that is split into two parts indoor and outdoor unit. (Unlike a portable unit).

This is where several indoor units are piped separately to one outdoor unit. (Usually between two and four units)

Variable Refrigerant Volume and Variable Regrigerant Flow systems are where a large number of indoor units can run from one large outdoor unit. This is done with one set of pipes picking up all the indoor units and then running back to the outdoor unit. (Usually used in commercial applications).

The inverter is an electronic device that changes the frequency of the electricity supplied to the compressor. This gives it speed control linked to output requirements. Using an inverter also allows the compressor to "soft start" which eliminates start up surge and allows it to run at slower speeds instead of stopping and starting. This greatly increases the life expectancy of the system. Inverter driven systems are around 30 % more efficient than conventional equipment.