Webapps are custom web applications local to your HDA.
See [http://amahi.blip.tv/file/1491674/| the screencast on how to use webapps] ( NOTE: it's the screencast is slightly outdated - the web apps webapps are no longer in their own tab - they are under Applications -> Webapps), and Advanced settings must be enabled for them to show.
Creating a webapp creates a root directory (gives you the choice to change it) and a short, local dns name to conveniently access that app.