AR Lite with SREngine Lite
The Lite version makes do without a server (up to 20 images can be stored on the device), doesn't require GPS or compass readings, so it works on the iPhone 3G as well as on the iPhone 3GS, and it's purely based on image recognition.
SREngine Lite recently won the Japanese "Next-Generation Communications & Marketing" award under the Future category. And, following the trend, Kanemura promises to "release SREngine Lite SDK for iPhone which allows developers to design own ar app.".
More details here. Tom covered SREngine Lite a couple of week ago, but I've waited for the English translation, mistrusting Google Translate.
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