With the iPhone v2.1 firmware software release, Apple is currently working on v2.2. It's possible that Apple is taking so long to implement copy and paste not because it is difficult, but because Apple is reinventing it. From this first glimpse it looks like Apple, now that the major bugs have been squashed, is adding some new features.
The screenshot, unearthed by iPhone Atlas, shows a new Safari interface. Right you see a shot from iPod Touch (left) next to a picture of the new v2.2 Safari. In the new browser, Google gets its own search bar (instead of popping up when you hit the regular URL bar) and the reload button has been moved the address bar, a purely aesthetic change which helps the text-entry areas to look bigger.
Of course, there's still no mention of copy and paste, a seemingly ridiculous omission from such a powerful device. But I have a theory: Apple won't ever put it in, at least not in the form we currently know. The iPhone model is quite different from that of a proper computer. In a Mac or PC, you use the operating system to act on files, be they pictures, e-mails or text documents.