An unlocked phone is one that can be used on all networks operating on the frequency the phone is designed for. For example, in the UK there are four main networks, Vodafone, BT Cellnet, Orange and One2One. Vodafone and BT Cellnet operate on GSM900, while Orange and One2One operate on GSM1800. A UK dual band phone can operate on GSM900 and GSM1800, therefore being capable of working on all the networks.

However, as the networks don't want to lose you as a customer, when they supply the phone (on contract or pay as you go) it can be locked to only accept SIM cards from their network.

If you wish to use a SIM from a different network, the phone needs to be unlocked.

How do I know if my phone is locked?
There are two ways to check if your phone is unlocked. Firstly, if you have a working SIM from a different network, try putting that into the phone and switching it on. If the phone works and you can make calls on that network, congratulations, your phone is already unlocked. If a message appears, saying "SIM card not accepted" or similar, the phone is probably locked.