The cloaking device is a stealth technology invented by the Satyarans and first deployed aboard the G.S.S. Saratoga. As an effective counter-measure could not be devised, the technology was never placed into wide use by the Gudersnipe Foundation.
Method of Operation
The technology works by bending waves around a given object. Since all sensor systems work by bouncing waves (radio waves, light waves, etc.) and looking at what comes back, it effectively renders the ship invisible. One does not see "through" a cloaked object, but rather "around" it. For this same reason, cloaking devices cannot obscure structures on the ground or attached to another object.
The cloak effectively takes the place of a shield. Only light is "bent" so a solid object, such as a missile, or a particle beam, could still strike the ship(which would then be unprotected). In the case of the Satyarans, who invented the technology, it was was useless to them. Their ships relied on active radiation sheilding to protect the crew.
The technology also only effects the space around the ship. A strong enough power source within a vessel could be detected. The ion trail left by the engines can also be picked up, and a ship making enough course changes or with a high enough output may be detected by trail trail. Heat is another issue, though Gudersnipe ships already employ extensive thermal masking techniques. (This was another issue for the Satyarans, who had no such capacity).
The technology was invented by the Satyarans, who had no practical use for it. Their vessels lacked passive radiation shielding and thermal camouflage. To them it was just another dead-end technology. One scientist, however, realized that a ship capable of over-coming the flaws in the system could use it to great effect.
Three prototypes were given to the Saratoga; with one installed and a second kept in inventory to replace damaged components in the first. The third was meant to be given to Gudersnipe School to study and reproduce, but was stolen en route by the Kamians, and later retrieved in a chance encounter.
While the Foundation determined that it would provide a very significant tactical advantage, they never succeeded in developing an effective counter-measure, and decided that, since no one else had yet invented something similar, it would be best to keep the technology a secret. Better to have as a secret in their arsenal than to risk letting it fall into enemy hands.