A few days ago, Apple Insider noticed that one the new features in the 2.1 iPhone Firmware is the support for full-screen Safari web apps. These are simply normal Safari web applications, but they run without the Safari browser window around them. An example is http://webapp.net.free.fr/Demo/Index.html Try it on your iPhone. It looks and feels almost identical to something in the App Store.
There are few reasons why this might be a significant development. For one, creating and maintaining a web app is far simpler than creating an objective-c based iPhone application. Second, there is no requirement at all on web apps: Apple is not the gate keeper. Porn web apps, gambling Web apps etc.. are all 100% possible -- and will certainly be developed. From a user perspective, they live on the iPhone desktop as icons just like any other app. And as the demo shows, they can mimic the Apple UI standards perfectly.
What are the limitations of web apps? First of all, they cannot access the accelerometer, the GPS, the camera or the contact list. Second, they tend to feel a little slower, making frequent calls over the internet as opposed to pulling data locally. Finally, they can't benefit from the AppStore payment mechansim -- meaning that they will most likely have to be add supported.