Option 1:
Use one of several cross compilers, compiling Java to ObjectiveC:
http://www.xmlvm.org/overview/
http://www.flexycore.com/ispectrum-overview.html
Option 2:
Package custom JVM with java application, with restrictions that meet the latest agreement (including no byte-code download capability and no JIT compilation). No JVM specifically designed for the iPhone is currently (Oct 2010) available, though the IKVM might run on top of Monotouch, and Oracle may build a version of the Java SE for the iPhone eventually.
Option 3:
Cross compile Java to one of the existing interpreters that are already accepted on the iPhone (eg, cross compile Java to C# and run the app on monotouch)