Jailbreaking is the process by which an IPhone firmware is modified to allow applications that apple would otherwise not allowed to run on the IPhone. Jailbreaking adds an unofficial installer application (similar to the AppStore) called Cydia or Icy which let you download many more 3rd party applications that Apple have hidden/blocked from users of the IPhone to "protect" them.
There are very minor risks involved with jailbreaking and iPhone. Worst case, if something goes wrong, you will have to reset it to factory settings through ITunes. In this scenario, you would lose all your settings/apps.
Two of the main reasons to Jailbreak your IPhone is to install 3rd party applications, or to Unlock your IPhone so that it works on any provider.
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