Georg notes that it still needs a lot of work - the camera's narrow field-of-view is problematic - but they can already make and track small maps. Of note is the use of the iPhone 3G rather than the 3GS with the built in compass see
http://www.robots.ox.ac.uk/~gk for full details and past projects.
Thanks go to Greg Downing for the link, anyone interested in panoramas and 3d modelling techniques should take a look at his work via http://www.gregdowning.com/
See also Augmented Reality for Android: GIS in the City and Location Based Augmented Reality for Android: Enkin