From wired.com:
Cringe as the video shows the software logging each number as Eckhart fingers the dialer.
“Every button you press in the dialer before you call,” he says on the video, “it already gets sent off to the IQ application.”
From there, the data — including the content of text messages — is sent to Carrier IQ’s servers, in secret.
By the way, it cannot be turned off without rooting the phone and replacing the operating system. And even if you stop paying for wireless service from your carrier and decide to just use Wi-Fi, your device still reports to Carrier IQ.
The astute anti-Apple fans will remember a similar incident involving Apple tracking your movements via GPS which was, in the end, not nearly as bad as it may have sounded initially. Hopefully this will be resolved with a similar explanation.
But that this seems to record everything being done on the phone (...the software is installed on most modern Android, BlackBerry and Nokia phones...) is pretty bad. Added to the problem is that there's a multitude of carriers and phone manufacturers involved, all with their own company reputation and stock price to worry about, and you have the makings of a PR person's nightmare.