Some fun information about cholesterol: The liver generates bile acids from cholesterol, and excretes the bile acids and cholesterol into the bile. The bile is stored in the gall bladder; the gall bladder releases the bile into the small intestine when the stomach senses fatty food. Bile acts as a detergent, breaking up the fat into small droplets so enzymes from the pancreas can work on the fat, The bile acids and cholesterol are absorbed by the small intestine; the liver extracts them from the bloodstream back into the bile. (Cholesterol blockers work by inhibiting the absorption of cholesterol in the small intestine.)
That depends on the medicine.
The older ones like cholestipol, cholestyramine and the newer version Welchol (colesevelam) work by binding to bile and preventing it from being reabsorbed in the terminal ileum (the last part of the small intestine). This forces your liver to make more bile - which is made from cholesterol.
The newest one, estimibe (Zetia) works by inhibiting the absorption of cholesterol in the small intestine (probably by blocking "sterol binding proteins"). Sure enough, diarrhea, gas, and bloating are potential side effects.
The most popular ones, the "statins", work by inhibiting an enzyme that is the rate limiting step in cholesterol synthesis. Most of the cholesterol in your blood is actually made by the liver, not absorbed from the diet.