Whenever you talk about games on a mobile platform, you usually have to also mention that while things like high-end 3D graphics are certainly possible, there are usually some concessions that have to be made. But in the case of the iPhone, perhaps not: Epic Games has apparently been showing Anandtech their Unreal Engine 3 on Apple's handheld, the same graphical engine that runs modern console hits like Gears of War 2 and Batman: Arkham Asylum. There's even video, and the thing looks pretty darn incredible. It's possible that in the hands of a skilled developer, you could have a very impressive realistic graphical game running on the iPhone hardware.
Some of the iPhone hardware, that is -- the engine was shown off on the 3GS and the 3rd generation iPod touch, so only those have the speed and power (and the OpenGL ES 2.0) to pull this off. But it's impressive nevertheless. Epic hasn't licensed this version of the engine yet as far as we know, but they promise to show off more in the future, so we'll be keeping an eye out. One more version of the iPhone, and we might be looking at games that can compete graphically with even modern consoles.