It actually indicates GPRS attachment status, the capability (or lack thereof) of sending and receiving data, be it over plain old GPRS, or the faster EDGE. I was going to comment on the original Engadget blog post, but after seeing a few pages of comments already, I doubt they would have noticed it. This is where they get it wrong:
You’ll notice the iTunes WiFi Store icon, and an O2-UK network symbol up top. If you look carefully, you’ll see that the E logo for EDGE is missing: we guess that 30% network coverage on O2 don’t quite stretch inside the Apple Store.
A bit further down, they mention this again:
O2 iPhone on the left, unlocked US iPhone on the right (running on T-Mobile’s UK network). Note that the O2 iPhone doesn’t show the EDGE logo, but the unlocked phone on T-Mobile does. You can probably guess at what we’re getting at here: O2’s EDGE coverage sucks.
In this particular side-by-side photo, T-Mobile’s coverage is marginally lower than O2’s, but they should both be capable of sending GPRS traffic. Another reason they get this wrong is that the waves icon ‘overwrites’ the E symbol while the iPhone is connected to a WiFi network, so you could still have GPRS/EDGE attachment in the background, so-to-speak. In my particular case, the iPhone is happily registered on Vodafone Spain, and is attached to GPRS (no EDGE here at all), showing the E while I’m not in range of WiFi.
The iPhone also does something very clever – when you open an application that requires a data connection, it will start a GPRS attach and session, while it asks you if you want to join any of the nearby WiFi networks (if any). In case you say no, the alternative data connection is already established, cutting down on extra waiting time before you start seeing content on your screen. This may seem stupid to Europeans, by default stuck with hugely expensive pay-as-you-go data (50 Euro cents per 250kB!!), but with the original AT&T voice + data plan, it does not really matter.