No, it doesn't hack the iPhone and install an application. It writes a password protected web page to the file system on the iPhone, and you access it through the browser. So, the URL you look at starts with "file:///", but it acts just like a web page on the phone.
I haven't tried many of the other similar applications, but it seems to have a pretty killer combination of password storage, strong generation, and synching. And, they are beta-ing a service to securely keep passwords on their site so that you can access them across machines. I'll have to see what that looks like when it appears, but I'm pretty happy even without that.
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1Password is great software. I've been using it for about a year and it's the best tool I've found. Especially when coupled with AllBookmarks (free, same developers). Saves a lot of clicks.
I still keep KeePassX around for managing and sync'ing passwords that I use on Windows, but 1Password is the way to go if you're lucky enough to just work on Macs.
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