When we talk about "jailbreaking" the iPhone, that means opening up the underlying file system on the phone for full read/write access; on a vanilla iPhone, only the 'userland' data is accessible to users and apps. The term is derived from Unix jargon, where a "chroot jail" is the limited section of the file system that an underprivileged app can access.
A jailbreak allows third parties to install and run any software they want, rather than the subset of iPhone apps approved by Apple and distributed through the App Store. Before Apple's official SDK was released, jailbreak apps were the only native (non-web) apps on the platform aside from the built-in apps that shipped with the device.
As TUAW has posted about in the past, the jailbreak software community is a hotbed of innovation and creativity. Many iPhone technologies debuted first in the hobbyist jailbreak community before ever appearing in official Apple firmware. Jailbreak-first features included copy and paste, spell checking, application folders, rotation inhibition, multitasking, find-my-iPhone, and more. In terms of iPhone possibility and expression, the jailbreak community has led the way.
Over the weekend, Redmond Pie announced that the iPhone 4 was successfully jailbroken. This proof-of-concept jailbreak showed that the new iPhone model could be opened for general file access. It is not, however, a "production" jailbreak; because the proof-of-concept used proprietary Apple code, it will not be released to the public. There is no word yet as to when a more intellectual-property-friendly version will be finished, but one guesses "soon" -- with no rush for the all-volunteer development team.
Screen shots of the new jailbreak follow in the gallery below, to provide you with a sneak peek at what's coming up.