Originally posted by walter Total speculation here, but I think there's more to it than just jpeg conversion. I suspect they take the picture with the sensor set at one stop slower iso, then boost the exposure of bottom half of the raw data to match the intended exposure. That would explain the additional stop of highlight detail, inability to work with ISO 100, and increased shadow noise.
Sounds very reasonable, and fairly easy to confirm if we only had a couple files (with vs without EDR) of the same subject to compare -- where did you see K20D photos that evidenced the three aspects you mention above? Their EXIF data might answer a couple other questions I had.
Incidentally, there's a much better way to get High Dynamic Range if you're willing to do a bit more work: take a set of up to 5 RAW shots using Exposure Bracketing at +-2EV. This will give you an additional 8EV (4 at each end.) Then run the set through a $99 post-processing utility called PhotoMatix Pro for both Windows and Mac:
http://www.hdrsoft.com/
Photoshop CS2 and CS3 also have HDR-related commands and tools that try to do the same thing.
The whole HDR concept and workflow is explained very well at:
http://www.naturescapes.net/072006/rh0706_2.htm