On iPhone, you can have one application open at a time. Compare this to the desktop where you can have an almost infinite amount of applications running at once with easy one-click focus-switching. If you keep your application’s settings in the Settings application on iPhone, your users have to go out of their way to change how something works. That means they have to quit your application, go to the Settings app (which is most likely on a different home screen page), find the application in the list (if you have 20 apps that have settings, this can be quite a chore), change a setting, quit Settings, find the application again, open it, and see if it did what you wanted. Especially if the user would like to experiment with a few preferences, that requires them to switch between your app and the Settings app a few times. Talk about inconvenient.
…
See these ×’s? This means your app is temporary. A user can delete your application whenever they so choose. The applications that come standard on the device cannot be removed and have all the settings they require in the Settings app. Your settings should be in your app, as they are just as temporary as the application itself.