iPhone 4 camera - how does the HDR mode work?
Here is an article that provides a really good run down on what HDR is and how it performs on the iPhone.

Basically it takes three photos at various exposure levels and combines them.  So you get a "normal" photo at regular exposure levels and the HDR version (1 photo composed of the three).   Results vary depending on light conditions etc.  I've had some really great results and some shockers.