Thanks to aCujo.
What we know
The team has developed a soft jailbreak based on upgrading your 1.1.1 or 1.1.2 iPhone or iPod touch to 1.1.3 software. You perform this upgrade by decrypting a disk image inside the Apple-supplied ipsw archive. This archive lives in your home library and can be downloaded on-demand from Apple. The team will supply the decryption key along with instructions on how to perform the soft upgrade--there may be a tool as well that automates this process similar to the jailbreak.jar from the 1.1.2 jailbreak. Those who have avoided upgrading in order to preserve their iPhone unlocks will be able to use most of the 1.1.3 software but will not have access to the new Google Location feature.
Baseband and Google Location: You won't have to upgrade your baseband--but Google Location won't work unless you do. So that's a tradeoff. If you don't plan to unlock the iPhone, you're better off upgrading your baseband. Don't forget: Downgrades are limited to boot loader 3.9. With 4.6, you can downgrade the firmware but not the baseband. (Thanks Nervegas.) Nicholas A. asks "Can AT&T customers update to the new baseband and still have a jailbreak?" Yes. Alva E: "Will this work with IPSF?" Yes--but don't upgrade your baseband!
Gaining access to Google Location (prevents unlock) I'm told (again, thank you NerveGas) that the easiest way to upgrade is to use iTunes to upgrade to 1.1.3 and then downgrade (TUAW method, better illustrated method) to apply the jailbreak. This allows you access to all the Google Location stuff plus phone calls if you're an AT&T customer. If you're not, it's best to stay below 1.1.3 and *then* do the jailbreak.
1.1.3 Unlock? No. Yes, people are working on a 1.1.3 unlock--but that's not going to happen in the same short time frame that the jailbreak will appear in.
Prerequisites Hav0c asks: "Can you update from 1.1.1 or do you need 1.1.2?" NerveGas says: 1.1.1 will work fine.
When will the jailbreak be released? Current time estimate for jailbreak release: "Soon", according to NerveGas
What are bootloaders? Reader asks: "What's Boot Loader 3.9?" Answer Bootloader is the iPhone program that loads up the operating system (I think this comes from "pulling your self up by your own bootstraps"). Apple has released several versions of the bootloader and unlocks have been limited to which bootloader is running on your system. 1.0.2-1.1.1 shipped with bootloader 3.9. Newer iPhones run 4.6. This shows you how to check which version of the bootloader you're running. As a rule, it doesn't matter--unless you want or need to unlock.
How does this all work? The dev/elites are apparently working on making the upgrade as easy as possible, according to NerveGas. Since the devs cannot release the decrypted software (copyright issues), the jailbreak will tell you how to decrypt your own dmgs and load the updated software onto your unit. Nmrlron asks: "What happened to the not release 1.1.3 jailbreak until the SDK?" NerveGas answered: "This is not strictly speaking a full jailbreak. This is a soft upgrade process that lets us continue to keep the vulnerabilities secret."
Using special SIMs Will you be able to use TurboSIM/StealthSIM, etc? Since this frankenupgrade does not affect the baseband, one assumes that yes, you will be able to use these--but that's a personal guess and unconfirmed.