It can be activated by saying the name of the dragon that you want to see, then by breathing smoke onto it. The dragons appear as colored tendrils of smoke, making vision unclear, but voices and background noises can be heard perfectly clear. In order to end the connection one must breathe fire over the surface of it, so this makes it impossible for IceWings, RainWings, or SeaWings to use the mirror, as they cannot breathe smoke or fire.
Preyhunter salvaged it from the NightWing's island before the eruption. The mirror was first used by Preyhunter to check if Glory and her friends care about Sunny, whom they had kidnapped. He states that it didn't work as well as it used to, and that Stonemover may have done something to it before he disappeared.
After she escaped, Sunny stole the mirror and used it to follow her captors to the the desert. To keep it safe, she buried it in the sand before entering the Scorpion Den, following the Nightwings. In the epilogue, Sunny tried to retrieve the mirror but she couldn't find it. Whether it had been stolen or swallowed by the sands is unknown.
Darkstalker might have revealed that he enchanted it or a device similar to it when talking to Moon.