Carrer IQ is a software that is shipped with many smartphones like iPhone 4 and Android phones. It provides feedback to the phone carrier about its network and subscribers.
A developer named Trevor Eckhart who had access to a unmodified version of Carrier IQ discovered that Carrier IQ's software logs all the keystrokes a user make on their device. The software even logs interactions over secure connection (https). Trevor released a video explaining how the surveillance takes place. Carrier IQ tried to silence him by threatening with legal actions.
If you are curious about your phone having Carrier IQ, try this android app to find out.
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