I have researched development for the iPhone and iPod Touch as I too have wanted to develop apps for them. What I have found is that there is no legal way to run Java on either device yet. These devices run and only run programs created using Apple's objective C SDK and libraries.
However, I have found two roundabout ways to get Java to "run" on these devices: The first is to crack the OS to allow a Java ME Virtual Machine to run. However, when you download an OS update, there is a high risk that it could brick you device. The second way is not available yet, but supposedly will be in early 2009. Sun is working on a program to convert Java ME code into Objective C code that will run on these devices. Supposedly the converted programs will require no modification before being compiled. It is said that Sun is working with Apple on this project, but Apple doesn't really endorse it.
I read this on a website, but I don't remember what site. I just did a google search for "java on iphone"
Hope this helps!
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