The flaw, which affected all iPhones, was described by Apple thus: "Receiving a maliciously crafted SMS message may lead to an unexpected service interruption or arbitrary code execution."
Roughly translated, the exploit allowed attackers to gain access to the phone's OS and run its own code by sending a cleverly crafted SMS message, which confused the iPhone into spreading its cheeks.
We patched our iPhone this morning and can report no usability issues, at least on an iPhone 3G running OS 3.0 -- now 3.0.1, of course. No new features have been added.
You can update your iPhone by connecting it to iTunes and using the 'Check for updates' button.