>>2094305picrel is a cutaway diagram of a peterson system pipe. the steam-laden smoke comes from the bowl through the bore hole into the condensation chamber, hits the stem above the intake, swirls around and some of the steam condenses on the chimney and drips down into the well below the condensation chamber and out of the way. the smoke goes up the stem through the graduated bore and out the peterson lip. the graduated bore prevents gurgling caused by condensation at the entrance to the bore.
as
>>2094454 mentioned, not all Peterson System pipes have all the components. Some have a fishtail stem instead of the P-lip stem, some don't have the aluminum chimney sticking down below the bore hole, though the system standard pipes have a plastic extension in place of the aluminum chimney that works fairly well. All Peterson System pipes will have a military mount stem and the condensation chamber.
When you're done smoking, remove the stem and invert the pipe over a suitable receptacle, the contents of the well will pour out of the pipe.