The first game on a mobile that I saw that was effectively using a form of augmented reality was shown to me by the now editor of Cellular News in 2003/4. It used the camera to detect movement on a shoot em up game so that you literally turned the phone to aim.
Back then the idea of projecting a keyboard and using finger movements across the projected keyboard was already around, but the reality was still some way off. The technology is almost there - it is the price that is the issue.
If price is an issue it will be overcome through volume so you then have to ask what the benefits are and if the benefits are as compelling as not having to carry a keyboard in the device design then I think it is strong enough to deliver volume.
If I was thiunking of taking on iPhone it is this direction I'd take my designs.
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