The idea is to store the paritial derivate of the normal in two channels of the map like this
dx = (-nx/nz);
dy = (-ny/nz);
Then you can reconstruct the normal like this:
nx = -dx;
ny = -dy;
nz = 1;
The advantage is that you do not have to reconstruct Z, so you can skip one instruction in each pixel shader that uses normal maps.
This is especially cool on the PS3 while on the XBOX 360 you can also create a custom texture format to let the texture fetch unit do the scale and bias and save a cycle there.
More details can be found at
Look for Partial Derivative Normal Maps.