The iPhone was beat by Google Gears a plugin which lets Web applications work offline. PC World ranked Google Gears first because it "Tackles the single biggest hurdle to making Web apps truly convenient."
PC World describes the iPhone as a "Gee-whiz touch-screen interface and spartan case dial up a mobile revolution." They also explain the benefit of the iPhone as: "Mac OS-simple software offering slide-and-glide access to bright, colorful menus sets this cell phone apart from its rivals."
Rounding out the top five is One Laptop per Child XO, Time Machine, and Amazon Kindle.