Did you know you could use your unlocked iPhone in Israel with a Talk'n'Save SIM card? You most certainly can!
You will have full phone functionality, of course.
As for data connectivity? Not a problem. Get a 120 megabyte package - ample for light usage - for just $19.99/month. Or if you want unlimited surfing, it's just $79.99/month.
Talk'n'Save - Your iPhone in Israel. :)