This illustration shows how it's done. The camera identifies the darker areas of the picture (shown in red) and brightens them while leaving the rest of the image alone. The latest version of this technology is more sophisticated, too, because it increases the 'gain' (sensitivity) of the darker areas as the image is captured rather than just applying a software 'fix' to the processed image.
There's nothing particularly remarkable about Canon's system, and other makers have similar features. Nikon uses 'Active D-Lighting', while Sony has a 'Dynamic Range Optimizer'. Similar techniques can be applied later using software, like Photoshop's Shadow/Highlight command.
The advantage of in-camera contrast adjustments is that you can see straight away if the effect has worked and adjust the strength if not, and they mean you don't have to do any image-editing work later on. Newer systems are more sophisticated than software tools, too, because they can adjust the camera exposure at the time the shot is taken to make sure highlight detail is recorded too. This is the difference, for example, between the 'Active D-Lighting' system Nikon uses now and simpler 'D-Lighting' system used before.
The disadvantage of in-camera contrast adjustments is that what looks right on the LCD might not look right later on the computer screen or in a print. Sometimes the results can look a little artificial – you do need good contrast between highlight and shadow areas for the image to look realistic and vibrant. In-camera contrast adjustments can also cause difficulties later on if you do any image-editing. Nikon's D-Lighting system, for example, can produce a broad,barely-visible 'glow' around dark objects which doesn't show up in unadjusted images, but which can become quite prominent if you manipulate them later.
Canon's i-Contrast and similar systems are good solutions if you don't want to do much editing work later, but a combination of careful exposure (or shooting RAW files) and software adjustments are likely to produce better pictures.
