This is really basically the same theory as the iPhone bookmarklets Mat posted earlier (squeezing content into a URL), but it's a little less about function and a little more about storage. Currently, the iPhone doesn't allow you to save actual files locally, but it does allow you save URLs, so the idea here is to save entire applications (or other HTML content) in the form of a data URL.
It's a pretty wonky hack, but it works-- you can convert whole HTML pages, or even applications, depending on the URL length the iPhone's bookmarks allow, into data URLs (with the Perl script on that page if you don't want to do it manually), and then those data URLs can be loaded into MobileSafari on the iPhone, even in Airplane mode. The suggestion is made that this could allow persistent storage for web applications on the iPhone, but wouldn't that require allowing the HTML page to write to and read from the iPhone's bookmarks? Is that possible?
At any rate, maybe it's a good thing, for a little while at least, that Apple didn't release a "real" SDK for the iPhone. Web programmers are making their code do all kinds of flips and tricks to get every bit of access they can on the iPhone. People have been talking about browser-based, OS independent applications for years-- maybe Apple's insistence that iPhone developers go through the browser will bring about that world sooner than we thought.