What Happens to an Unlocked iPhone?by Robert Schrader
When you purchase an iPhone legitimately in the United States, you do so along with a service contract with either AT&T or Verizon Wireless. Both carriers "lock" the devices you purchase from them so you can only use them on their networks. It's possible to "jailbreak" or unlock your AT&T iPhone the same way you might an ordinary cellphone if you want to use it in connection with another carrier, but AT&T discourages the practice, as do most carriers. Several changes occur in relation to your iPhone once you unlock it.
SIM Card Functionality
The most useful effect of unlocking your iPhone is to make it possible to use the phone with any Subscriber Identity Module, or SIM card. If you insert another carrier's SIM card into a locked iPhone, you will simply see a "No Service" message at the top-left corner of your screen. Within a few seconds of inserting a Sim card in an unlocked device, however, the name of the carrier whose SIM card you inserted will appear.
Unlocking is an unauthorized procedure which requires third-party software. After you've completed your unlock, the program you use installs a third-party application store known as "Cydia" on your iPhone. Though it is neither authorized nor endorsed by Apple or AT&T, Cydia isn't malicious or illegitimate by design -- it simply provides a venue for downloading applications that Apple doesn't approve or whose developers don't wish to sell through Apple's official channels.
The type of software you use to unlock your iPhone depends not only on which model you use -- the iPhone 3G, 3Gs or 4, for example -- but also on which iPhone operating system, or "iOS," software version you have on your device. After you unlock your iPhone, however, it's no longer possible to automatically update your iOS software via iTunes. Doing this will relock the phone and resets your carrier to AT&T. So unless you find a backdoor route of updating your iOS regularly, it will never update its software; it will remain the same version you were using when you unlocked it.
Perhaps the most negative effect of unlocking your iPhone is that doing so explicitly violates the Apple Limited Warranty of your device. The document absolves Apple from performing repairs arising from "service, including upgrades and expansions, performed by anyone who is not a representative of Apple." Since Apple doesn't perform unlocks at its stores or authorized repair centers, this condition applies to all unlock procedures. If you damage your iPhone while or after unlocking it, you must pay out-of-pocket to repair it. The only exception to this rule is if you purchased a used, old-version model from AT&T and obtain an official "Unlock Code" via Apple.