It did work just fine, it actually had the best antenna of any phone on the market at the time - dramatic improvement on the previous models. Yeah it lost signal when held wrong but was still superior to other phones. http://www.anandtech.com/show/3794/the-iphone-4-review/2
Curious: What happens when, during a call, you lose signal and don't recover it? If the call doesn't drop, does it just stay connected, waiting for the signal to come back?
I think the point is that it wasn't ever a complete loss of signal. Signal strength drops a little, maybe the baseband turns up its gain and burns a little more power, and the call stays connected.
You didn't have to hold it a particular way - you had to avoid holding it a particular way. I had one for 2 years and didn't experience dropped calls beyond expected norms.