Using FFMPEG, Live555, JSON
Not sure how it works but if you look at the source files at http://github.com/dropcam/dropcam_for_iphone you can see that they are using a combination of open source projects like FFMPEG, Live555, JSON etc. Using Wireshark to sniff the packets sent from one of the public cameras that's available to view with the free "Dropcam For Iphone App" at the App Store, I was able to confirm that the iphone was receiving H264 video via RTP/RTSP/RTCP and even RTMPT which looks like maybe some of the stream is tunneled?
Maybe someone could take a look at the open source files and explain how they got RTSP to work on the iphone.