If you’ve been bandying around with a modified iPhone in any way, you may want to avoid upgrading to firmware 1.1.1, because real world tests have yielded less than favorable results. Based on a whole series of tests, the iPhone update does no harm to your handset if you haven’t done any modification whatsoever, but if you’re like most people, you’ve probably been dabbling in the unlocking and third-party applications.
From what we hear, the update will work on iPhone with Install.app, but it seems to get wiped out from your menu screen. It’s still there; you just can’t access it. The update won’t brick your unlocked iPhone, but it does return you to the activation screen and “from there, no activation is possible.” In this sense, it relocks the handheld. According the iPhone Dev team, third party applications won’t work after the update either.
Looks like the biggest (and worst) news is that your unlocked iPhone will be stuck in “activation limbo” after the update and you won’t be able to use your old AT&T card to bypass this. Ugh.