The Wallaby is a small to medium-sized marsupial which lives in the islands of Australia, Tasmania, New Zealand, and New Guinea. It is also the code name of a particular developer prototype phase of the first iPhone before it was publicly unveiled on January 9, 2007, and then made available to the public in June 29, 2007.
But what was a Wallaby? What purpose did it have? How did it look? Let’s find out, by putting together the bits and pieces of information which have been divulged so far.
According to former Apple software designer and developer Ken Kocienda, who used the Wallabies to make the software keyboard of the iPhone

“in the case of a product like the iPhone, I was issued this handheld unit that we call the “Wallaby”. It was the codename for the prototype touchscreen hardware and it was a display that responded to touch, but you needed this tether coming out of it that connected to this computer board.

Here’s a picture of a prototype board, the so-called red iPhone M68, from circa 2006/2007.

The board was actually just one-third of the total development setup.
Kocienda went on and explained:

“I had a bare computer board sitting on my desk for basically a year and a half that was then connected with other cabling to an old blue-and-white Mac tower desktop computer, which provided the computing power to drive the display. All of that gear together made it possible to start experimenting with the software experiences, that I could write some code, run it on this desktop Mac, and have it show on the handheld device as an external screen.”

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It’s also important to remember that in 2005-2007 a PowerMac G3 was old hardware and it was chosen exactly for that reason over a G4 or a G5 because it helped simulate the slower speeds of mobile phone hardware.
By the way, if you’ve read a previous Stories of Apple article it will be evident that there are also many similarities with the Newton MessagePad device development, done in the early Nineties.

Apple actually used this kind of setup since the iPad development, which predates that of the iPhone. In a June 2017 Computer History Museum video Q&A, Apple engineer Nitin Ganatra, around 11:21, states that in 2005 at Apple

“they had this Macintosh hooked up to a [prototype] tablet, with this big fat cable between the two”

This setup was clumsy, more so if one takes into account the incredible level of secrecy enforced by Apple executive Scott Forstall.

In his recolections Kocienda writes that

“if I had an idea and I wanted some feedback and wanted to get a response to it, there was always somebody you could go to their office and show them the latest demo. (Or in those early days call them into your office because you just couldn’t pick the thing up and move around with it so easily.)”

And getting into that office wasn’t really easy or straightforward. At all. As Forstall himself revealed to Leander Kahney in the book “Jony Ive: The Genius Behind Apple’s Greatest Products”

“We put doors with badge readers, there were cameras, I think, to get to some of our labs, you had to badge in four times to get there,”

As far as what the Wallabies looked like, the only picture available is the one shared by Kocienda, before he parted with the devices when leaving Apple

On the other hand, regarding the “Wallaby” name, there is no clear reason for this choice.
In the aforementioned June 2017 Q&A session at the Computer History Museum, when asked about iPhone’s “Purple” codename, engineer Scott Herz (at 18.05) says

“Not a Kangaroo. […] There was a Wallaby, which kinda looks like a kangaroo, I guess, which was purple. But I think it was kinda unrelated.”

The other potentially related tidbit is that (then) Apple chief designer Jonathan Ive has been often seen wearing a specific type of moccasin shoe made by Clarks, which is called… the Wallabee.

Note: The picture of the Wallaby prototypes is by Ken Kocienda, the G3 development image comes from an interview of Greg Christie with the Wall Street Journal, while the red iPhone M68 board photo is by Tom Warren / The Verge.