As previously mentioned iPhone Web applications are essentially web applications which run of the Safari browser on the iPhone. The major difference from native web applications is that they cannot access the hardware features like accelerometer, file system etc. They are constrained to run in the sandbox of the browser which is similar to other web applications.
The easiest way to build iPhone web applications is to take your existing web applications and fix the layout so that they match the layout guidelines on the iPhone. The biggest change that this would require is to reduce your real estate to match the size of the iPhone. Also the navigation and usability needs to be changed to better suit the iPhone usability idioms.
The biggest usability change that can be seen in iPhone web applications is the streamlining and extreme focus that it has bought to existing web applications. Instead of the typical web pages which are crammed with content, navigation, lists, advertisements, promotions in every nook and corner, iPhone web applications need to be extremely streamlined and focussed in their approach.
This streamlining and focus is achieved with categorizing every page into only two different kind of layouts. These layouts are firstly a list based layout and secondly an action based layout. What this means that any existing web application need to be broken down into independent screens, each of which need to be either a list based screen or a single action based screen. This is apart from the additional navigation which can be provided in the form of a Next/Previous buttons in the top bar or a tab based navigation.
There are already a lot of tools which help you convert your existing web applications into iPhone applications. Below we mention two of them which probably might be the only thing you need to build iPhone web applications.
IUI is a "User Interface (UI) Library for Safari development on iPhone". It essentially contains the CSS and layout required to create iPhone-like applications. IUI is getting popular by the day and contains everything you will need to morph your web application into an iPhone web application. Using IUI the only thing that you need to do is to first divide your application pages/actions into either of a list based screen or an action based screen. Once that is done you might need to change your backend to expose the relevant data and actions per screen. Having decided on your screens you simply need to skin them using the CSS and layout provided by the IUI to have a working iPhone web application ready.
IPhone tester is itself a web application used to test out other iPhone web applications. iPhone Tester gives a mockup of the iPhone and the safari browser and you can simply type the URL of your web application to see how your web appliction will look like on the iPhone.