The rejection of Manomio's Commodore 64 emulator for the iPhone has generated an enormous amount of debate and discussion surrounding Apple's acceptance policies and the App Store. A closer read of the cited SDK section appears to specifically limit the execution of outside or downloadable code, which seems to make Sega's Golden Axe and Sonic fixed single-emulation games permissible. The commonly held beliefs surrounding why Apple would implement these restrictions seem to center around 1) revenue and 2) control.
Before the introduction of in-app purchasing, allowing developers to sell ROMs or other downloadable content outside of Apple's control was seen as a possible threat to Apple's revenue stream. This argument, of course, is less relevant after the release of the 3.0 firmware which permits in-app purchasing. However, as these restrictions on downloading executable code remains in place, even Sega would presumably be unable to introduce a generic "Sega Arcade" application that would allow in-app purchases of games individually.
The second reason for the restriction seems perhaps to be the more notable one. If Apple were to allow apps to download, install and run arbitrary code, they would lose control of the device experience. It could also open the door to alternative platforms such as Java or Flash, and also introduce security concerns into the device.
The initial C64 app that was submitted to Apple was an emulator application that comes packaged with 5 games and Commodore Basic. The games are presented in a nicely depicted shelf which allows you to pick and choose which game you'd like to play. These features, by itself, seem like they would not run afoul of the published SDK rules.
The C64 emulator, however, also offers a "Store" to obtain other Commodore C64 titles. I suspect this is where a red flag would have been triggered. What's interesting, however, is that the titles offered in Manomio's "C64 Store" are not downloadable within the C64 app, itself. They are simply links to individual App Store apps that contain the Disk Images themselves. Those apps, of course, would also be individually approved by Apple and purchased by the end user just the same as any other application.
These standalone game bundles then install themselves into the original C64 app through published SDK APIs. Such a procedure would still preserve Apple's revenue stream and also allow individual approval of every Commodore 64 application that would be introduced into the App Store.
While a very nice system for the end user, I suspect Manomio will have to settle for a less ambitious system if they hope to make it into the App Store.
We asked Manomio if they had considered simply falling back to individual fixed-rom packs like Sega's games and they said they have, though it's likely to be their final option.
Of course, this is all speculative, as the BASIC interpreter itself could have also been the offending issue alone.