I'll skip to the ending: if you have an unlocked phone or third-party apps, don't upgrade to iPhone software 1.1.1. You don't need the WiFi iTunes store that badly, do you?
Gizmodo has a long, relentlessly geeky post breaking down every permutation of hacked iPhone vs. Apple update. Basically, if you have an unlocked phone, you may be able to get it working with a valid AT&T SIM card - but you'll have a locked phone on your hands, and the various software unlocking tools no longer work. Third-party apps won't be wiped out, but they'll be unusable with the new update.
Bottom line? Wait for people geekier than thou to sort through the mess and get things working again. Apple can't even lock down their iTunes DRM, so it's doubtful any changes they made will permanently lock out the hackers, and none of the improvements are earth shattering. Though, displaying the battery life of the Apple Bluetooth headset on the iPhone is fairly neat. Not as neat as, say, iPhone GPS, but what can you do?