iMessage, the latest of top ten great feature of iOS 5 which introduced in WWDC 2011.
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What is iMessage?
It’s BBM-like application for iPhone, iPod touch, and iPad. Yes, iMessage is an exclusive messaging service for iOS users, which comes with delivery and read receipts to track message, see when someone is currently typing message, and the ability to push messages to all your devices.
With iMessage, Apple have created a new messaging service for all iOS 5 users. iMessage is not only iPhone Messenger, but iPad and iPod touch also join the conversation.

iMessage is even better compared to BBM. You will be able to send messages, photos, videos, and contacts to other iPhone, iPod touch, or iPad users over 3G and wi-fi. BlackBerry Messenger (BBM) can’t beat it yet.
iMessage works over either WiFi or 3G and looks to be making good use of Apple’s new push notifications. You can send unlimited text messages on iPhone, iPad, or iPod touch to anyone with one of those device over Wi-fi or 3G.

Group messaging will also be available.

You don’t need to download iMessage app separately, iMessage is built into the Messages app, so you can send text, photos, videos, locations, and contacts directly in existing Message app with iOS 5.
Enjoy the secure conversation with text messages encryption on iMessage.
Watch the video demo of iMessage feature on iOS 5:
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does it have status updates and/or display pics like BBM?
No, it's only messaging system. It may has avatar but doesn't have status update.
what happens when you are watching a show on your iPad, texting on your iPhone, and surfing the web on your mac and you get an iMessage? Which device(s) notify you? All of them?
No iMessage on Mac, but you will get iMessage on all other devices. I don't know if iMessage would be compatible with iChat (on mac).