Basically the same as it works on the Internet.  Webmasters who own their own websites program their sites to be mobile compatible.  When it's mobile compatible Google can then display mini 'pay-per-click' ads on websites that phone users visit.  Due to the nature of the small phone space that these ads are in - most likely phone users are tempted to click them.  I have Internet on my  cell phone and I've been compelled to click myself...so I know it works!

It Adsense for mobile content works the same as normal adsense for content. The only difference is that it is to be used for mobile sites. However I have not heard of anyone making much from it.