There are aGPS and gps. For those iphone 1G users they can use aGPS which required internet access for positioning. However the position accuracy is very lousy.

For iphone 3G users, u can use the GPS feature without any gprs or wifi connection.

For the route guiding i think we put our faith on those 3rd party developer instead of waiting from apple. Im using a appstore offline map on my iphone in china which u can look for restaurant, bank, public facilities and bla bla bla, route guiding for public transport or driving, traffic flow.... Gt anything but just lacking of GPS function.