With the lifting of NDA by Apple, many developers have opensourced their iPhone applications. While the phone OS itself may be closed, you can still run free and open software. Here is a list of the best open source on the iPhone.
penClip is a non-profit, open-source, community-effort project, which promotes a framework for the iPhone that allows users to copy or paste between participating applications. 
Linux 2.6 kernel has been ported to Apple?s iPhone platform, with support for the first and second generation iPhones as well as the first generation iPod touch. This is a rough first draft of the port, and many drivers are still missing, but it?s enough that a real alternative operating system
is running on the iPhone.
iPhoney gives you a pixel-accurate web browsing environment that you can use while developing web sites for iPhone. 
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