How Digital ICE Works
You can read more on it at Wikipedia, but the quick version is that infrared light is used to detect physical bumps in the film which are outside the range of the emulsion, and thus not part of the image. The scanner will identify these pixels in the image for removal and replacement to make it look like it was never there.
What It Works With
Color film, and only 35mm and medium format size. Kodachrome slides require the latest iteration of Digital ICE, used in the Nikon 9000. Otherwise, you will get distortions and parts of the image, such as the pupil of an eye, will be mistakenly detected as dust on the film and removed (yikes!).