The vulnerability is in the way the iPhone handles text messages (SMS). By sending a series of mostly invisible text messages, an attacker can take over all the phone’s functions including dialing the phone and turning on the camera and microphone. Apple was notified about the flaw over a month ago but no patch has been released as of this date.
Read more here:
http://www.forbes.com/2009/07/28/hackers-iphone-apple-technology-security-hackers.html