A small computer and specialized software in the SIM are designed to protect your phone services from unauthorized parties, securely store your personal information like your phone contacts and provide other applications like faster Web searching and ringtone access. Whether your SIM has these applications or not depends on your GSM operator, however.
The same wireless phone network that carries your voice conversations also carries information between your service provider and the SIM in your cell phone. It's how the network can always find you to give you your phone calls, anywhere in the world.
Information stored in the SIM gets updated as it changes. A good example is the list of international network partners - you never see it, but it enables international roaming when you travel. The mobile industry refers to this technique of delivering services through its wireless network as over-the-air (OTA). This gives service providers the means to upgrade services directly to your phone in real-time.