The only applications loaded in by default were SMS, Calendar, Photos, Camera, Calculator, Stocks, Maps, Weather, Notes, Clock, Phone, Email, Safari, iPod and Settings. While the list may seem impressive typed out, there weren't even enough applications to fill the whole screen. There certainly weren't the 50,000 applications that are available today.
Steve Jobs and company told us from the beginning there wouldn't be an SDK. Instead developers were encouraged to write web apps, taking advantage of the iPhone's great mobile browser. Obviously people weren't happy with this arrangement, and jailbreakers (including our own Erica Sadun) got to work shoehorning in native applications with no help or documentation from Apple.
Just 2 short months into the life of the original iPhone, Apple dropped the price by $200. Early adopters (yours truly included) were a little upset with Apple for such a dramatic price drop so soon in the life cycle of a product. We were appeased with a $100 Apple gift card. The price drop moved the iPhone from an expensive luxury item into a semi-affordable one. The 4GB version was also discontinued a short time later.
During the lifetime of the iPhone 1.0 software, Apple added some functionality like access to the iTunes music store on the iPhone (via WiFi only) and the YouTube app (Note: as commenters point out, the YouTube app was always there).
The main complaints about the first version of the iPhone were no 3G, no GPS, no cut-and-paste, no native applications, no MMS, no background applications/push notifications and no tethering. The iPhone was miles ahead of most phones in some ways, but it ignored some functionality found on some more basic phones at the time, like voice dialing and video recording.
iPhone 2.0 and iPhone 3G
Almost exactly a year after the launch of the original iPhone, Apple released iPhone software version 2.0, along with new hardware. These 2 things solved some of the issues people had with the original iPhone, and the App Store was a true game-changer for both the phone and the developers.
The release of the 3G also meant the end of unsubsidized iPhones and at-home activation. Until the release of the 3G, people could walk right into an Apple or AT&T store and walk out with an iPhone in just a minute or two, connect it to iTunes and set up their account at home. The unsubsidized nature of the iPhone was also a game-changer in the land of cell phone carriers, and was expected to revolutionize the way cell phone carriers and their contracts worked. Depending on how you look at it, either fortunately or unfortunately Apple and AT&T went back to the "traditional" way of doing things, offering subsidized phones. As a result the 3G was "twice as fast and half the price".
The iPhone 2.0 software was also made available to original iPhone owners, so everyone was given access to the App Store and the goodies contained within. The App Store itself revolutionized cell phone applications and the iPhone ecosystem. It turned the iPhone into a gaming platform, a productivity tool, a fart machine, and more.
The release of the 3G meant that people had no more complaints about the iPhone's lack of 3G, GPS, and lack of native applications. Still, people (rightly) complained about lack of MMS, tethering, push notifications (promised but never delivered) and copy-and-paste.
iPhone 3.0 and iPhone 3GS
Apple had listened to everyone's complaints regarding the first generation iPhone and fixed all of them that they could. Through the software update, 3G and 3GS owners were given MMS and tethering (as long as their carrier allowed it). All iPhone owners were given copy-and-paste and push notifications.
With the 3GS, Apple fixed a few remaining complaints like video recording and voice commands. Other hardware changes were the addition of an autofocus camera and magnetometer for compass functionality. The phone itself is relatively unchanged, and in fact the 3G is still available for just $99, effectively squashing the rumors of an "iPhone nano."
Developers were also given access to the dock connector. We haven't yet seen the results this will produce, but if I had to guess I think in the next year we'll see a whole lot of iPhone accessories that will add an amazing amount of functionality and value to the iPhone. Maybe an external keyboard, or gamepad. We've already seen uses in the medical and musical field in demonstrations.
It's amazing how far the iPhone has come in just two short years. Since the release, through either hardware or software the iPhone has gained the iTunes music store, the App Store, GPS, 3G, video recording, a compass, MMS, tethering, copy-and-paste, 50,000 applications, Exchange support, push notification, Bluetooth headphone support, and more. It's gone from an incredibly expensive luxury item to a "must have" for businessmen and teenagers alike, for totally different reasons. It's evolved from a "cool phone" to arguably the most advanced smartphone with the widest array of applications. It's truly revolutionized the mobile world and influenced the phones that other companies manufacture.
I, for one, can't wait to see what's in store for version 4.0.