HzO is a waterproofing technology for smartphones like the iPhone that won't be available to us (the consumers) but will be available to device manufacturers like Apple for use in the production process. (Whether Apple decides to make use of it -- or something similar -- is another story.) The thin coating, which they have named WaterBlock, once applied prevents water from coming in contact with the electronics inside the device, thus making it water resistant and giving you the ability to dunk it and not have worry.
If you're wondering whether it works or not, it surely seems to. Walking around CES 2012, I saw the HzO display with some devices sitting... underneath falling water, still fully functional, like it was nothing. People were using the phones, playing music, just like normal. Even with SIM card and battery exposed, an Android phone remained fully functional. There appeared to be zero damage to any of the electronics.
Again, there's no way to know if Apple will ever use something like this for the iPhone, but we sure hope they do.