The future of Iphone gaming is in testing! The guys at anandtech.com got a sneak preview of a modified Unreal 3 engine demo running on the Iphone and Ipod touch, there is much work to be done but the video will show you that they are almost there.
I think controls are the biggest hurdle now, limited screen space and fat fingers would ruin an otherwise playable game. Perhaps the answer is in the accelerometer technology, either way we are in for some decent handheld fun in the near future.
Article here
Unreal Engine 3 for the iPod Touch/iPhone 3GS
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