If you're still with me - the system should be fairly simple. The service holds both a Bitcoin and a cash balance. When two parties agree to trade, the buyer sends Bitcoins, plus a refundable extra amount to account for immediate price variance, to the escrow. When the transfer is sufficiently confirmed, the escrow immediately pays the vendor, transfers the BTC into an exchange and dumps them. Any profit on the trade (less any service fee) is refunded to the buyer.
This way, the small exchange rate risk is transferred to the buyer, and the vendor never even needs to know what a BTC is.
The problem is that escrow resolution can take a long time, in a period when BTC exchange rates are still subject to reasonably high variance. What happens if the extra bitcoins paid by the buyer don't cover the currency fluctuation? If I'm buying something for 10 BTC at a time when the exchange rate is $15, and the exchange rate drops to $7.50 in the two weeks that it takes for the escrow to complete, that means I have to tie up 20 BTC to cover the transaction (or more, depending on how much variance you want to cover). It's made worse by the fact that if a merchant has shipped something, and the extra BTC balance no longer covers the cost of the trade, then either the escrow service or the merchant is SOL. Since the escrow service has essentially 100% exposure on this, the fees will probably need to be pretty high.