For our money (and we were two of those early purchasers who bought iPhones before Apple lowered the price $200), one of the best features of the iPhone is its upgradability. Since the iPhone runs OS X, there's room to add features as well as fix bugs; the latest version does both.
iPhone 1.1.1 is now available via iTunes (it's a 152.3 MB update): the next time you connect your iPhone, click the Check for Updates button if you're not automatically prompted about the update. Note that if you've unlocked your iPhone to use a provider other than AT&T, installing the update may make your phone inoperable (more on this issue below).
This version adds a few niceties introduced with the iPod touch, such as the capability to double-tap the Home button to bring up either the list of favorite contacts or iPod playback controls (avoiding the need to navigate to either from the Home screen), and the new iTunes Wi-Fi Music Store for purchasing music directly from the phone over a Wi-Fi network (see "," 2007-09-07). (Apple has also  demonstrating the new features.)
Other feature changes include the capability to double-tap the spacebar to insert a period and space, turn off EDGE/GPRS when roaming internationally (no doubt in response to several instances where people received huge bills; see "," 2007-09-07), view Mail attachments in portrait or landscape mode, view iPhone video on a television in TV Out mode, and adjust alert volumes. The speakerphone and receiver volumes are also reportedly louder, stocks and cities can be re-ordered in the Stocks and Weather applications, and the Apple Bluetooth Headset's battery status appears in the Status Bar.
A few have been uncovered, such as the capability to change your voicemail password from the iPhone and change the alert sound for new text messages, a debug console for Safari, and new video playback options including closed-captioning for movies that support it.
We also uncovered a couple of improvements in VPN support for those who like to make sure their Wi-Fi data isn't being snooped when using an iPhone on public networks.
Apple fixed a bug that wouldn't allow proper entry of strong passwords for a VPN after initial setup. In iPhone firmware 1.0.0 to 1.0.2, you could properly set up the details of a VPN connection in Settings > General > Network > VPN > Settings with the password left blank - the display reads "Ask Every Time" in gray. But when you went to enter the password to connect using the VPN switch that's added to the main Settings screen, instead of a full keyboard, the iPhone would show just a telephone-style keypad. Thus, alphanumeric passwords couldn't be used. That's fixed.
Apple also added support for RSA SecureID cards, a way of generating a constantly changing unique additional factor for connecting securely using a small keychain-sized fob you carry around. This is usually a two-factor method - password plus this separate token generated by the fob - but this implementation seems to be set up where you're prompted for the token after the VPN server is contacted.
A number of were rolled into this release, as well, repairing vulnerabilities in Mail, Safari, and Bluetooth.
Incompatibilities -- Glenn had modified his iPhone using Nullriver's  to install third-party programs. As a result, his iPhone wasn't initially happy about the update. (AppTapp isn't compatible with iPhone 1.1.1.) He had to force restart his iPhone - holding down both the power and Home buttons for about 10 seconds - and then choose a full restore. Fortunately, he had settings backed up to his work computer, even though he syncs to his home machine. This enabled the iPhone to relearn its phone number and be generally useful (if out of date) until he returned home for a fresh sync. Clearly, it's a good idea to sync and perform a backup before trying the update!
Some people who unlocked their iPhones to work with providers other than AT&T, however, discovered that the iPhone 1.1.1 update rendered the phones inoperable (in line with Apple's warnings earlier in the week that the update could "brick" the devices). Over the weekend, a of the iPhone's firmware was discovered, so the dead iPhones might be only "mostly dead" (to quote ).
For more discussion of Apple's bricklaying, see "," 2007-09-28.