So I was drinking coffee one day while I was e-mailing Chiru and I began to wonder how caffeine works in the body...so I dropped everything I was doing to look it up!
The following is an article I found which describes the mechanism well I think. I have added my own little comments in light blue and chopped out some of the super nerdy stuff the nobody cares about anyway. :-)
Enjoy!

Barone, J.J. and Roberts, H.R. Food and Chemical Toxicology, 34, 119-129, 1996.

CAFFEINE

The major action of 1, 3, 7-trimethylxanthine (Caffeine) is to stimulate the central nervous system. Caffeine is found in over 60 plant species of which the most well-known are cocoa-beans, tea and coffee. 

An average sized cup (150 ml) of ground roasted coffee contains around 85 mg, instant coffee 60 mg, decaffeinated coffee 3 mg, leaf or bag tea 30 mg, instant tea 20 mg and cocoa or hot chocolate 4 mg caffeine (hot cocoa has the same amount as decaf?! Sweet! Daily recommended amouts are about 200-300 mg for the average person, so three cups of coffee maximum?!).

Caffeine absorption from the gastrointestinal tract is rapid and virtually complete about 45 minutes after ingestion. The peak plasma (blood) caffeine concentration is reached 15-120 minutes after ingestion.  The half-life (time it takes for 50% of the initial amount to be depleted or broken down) of caffeine in the plasma is:
- 2.5-4.5 hours in young and elderly men,
-80 hours in newborn infants,
-over 100 hours in premature infants, 
-reduced by 30-50% in smokers,
-doubled in women taking oral contraceptives (time to go on the pill!) 
-rises to 15 hours in the last trimester of pregnancy (remember what I said about hormones affecting many things in the body??) 

About a dozen caffeine metabolites can be recovered in the urine but less than 3% of ingested caffeine.
[In humans about 80% of caffeine is demethylated to paraxanthine and about 16% converted to theobromine and theophylline in the liver. Further demethylation and oxidation forms urates and uracil derivatives. ]

Mechanism of Action:
Caffeine stimulates the release of intracellular calcium and inhibits the activity of cyclic nucleotide phosphodiesterases. Concentrations are well above those seen in the blood in response to normal intakes of caffeine, suggesting that the effects of caffeine are mediated by other mechanisms. Physiological concentrations of caffeine (about 100 ìM) act by antagonising the effects of adenosine. [Caffeine acts at A1 adenosine receptors which are negatively linked to adenyl cyclase and A2a adenosine receptors which are positively linked to adenyl cyclase.] Competition between caffeine and adenosine at cell surface A1 and A2a receptors lead to changes in the concentration of cyclic AMP inside the cell. This is the likely mechanism underlying the physiological effects of caffeine. (Cyclic AMP is the precursor to ATP, which is the body's form of energy. cAMP becomes cADP, then becomes cATP = energy for enzymes and cells to use freely for many processes) 
 

Ok, if you are still reading, kudos to you!

L