What they've done is gained access to the file system. This is HUGE, but it's not a useful hack just yet.
Here's a little of what they're able to do and not do:
They can copy files to and from the iPhone:
I create a file on my mac, called test.txt. In it, it just says "THIS IS A TEST". I copy it to /var/root with iphuc. It works.
Next, I delete it from the mac. Copy back from iphuc.
Yes, it copied back correctly. I delete it again, copy back, check. The /var/root section (at least) is writable and readable.
Right now, I can't get executable access to the iPhone disk. I can put files into the media partition, but it's "noexec" and I can't yet change fstab. So I cannot do screen shots from the iphone--or get shell access either. Everything right now is being done through AFC.
The last discussion I read is that someone found an exploit that they "hoped" would give them access to the file system. It was a method used by PSP hackers where they tried to open a malformed TIFF image with the browser and it crashed then dumped critical data to the user. The Dev Team didn't come up with this, but they did report on it and discuss it.
This didn't seem to give them full access to the file system. This hack, which has nothing to do with the method described above, is accomplished through hacking the phone prior to the 1.1.1 update then applying the update. This hack gives them full access to the file system, they can navigate all the folders. What they can't do is change the permissions to various files and folders *yet*. They can upload and download files from unlocked folders though. Read the page at the link I posted and you can see how it was done.
I should also add that now that they've gained access to the complete file system it's only a matter of time before they figure out how Apple has locked things down and hack it. We'll have access to our phones before Christmas I bet, probably much sooner.
The writer of the blog this thread linked to has no businesss writing about technology if he is clueless enough to read the Tuaw live-blog and come away thinking 1.1.1 was "hacked." Worse, he defended his cluelessness in a reply, with an even more cluseless reply: "...yes, it allows people to install third-party software afterwards (at least based on my reading of the process)." Uh, this does not allow people to install third-party software. At least not yet.
Oh, he also incorrectly identified the blog. Real sharp guy: "The two hackers in question actually live blogged their iPhone hack." Uh, it was Erica Sadun who live blogged, not "two hackers."