The Digital Computation Studio (DCS09) students are creating all manner of dramatic spaces in Second Life now at the UNSW Atoll. Things started out with a 'paper city' the students are in the midst of defining their region and then will then bring their own piece of that to life.
Here is the SLURL if you want to check out the fun:
The idea of running Second Life on the iPhone seems like a cool idea. Though there isnt any way to do this in any native kinda way. There are folk working on other ways like this one covered on Tech Digest: