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The iPhone is a closed device. We can't say this enough. Up to and including version 1.1.x of the iPhone software, users have been locked out of the operating system. This doesn't seem to stop a majority of iPhone users, but does make it more difficult to get started. Before hacking of any kind can take place, however, the iPhone must be broken free from its jail—literally.
The iPhone runs in a chrooted environment, where no user or desktop application—even iTunes—can see into the operating system; this is commonly known in the Unix world as a chroot jail. This jail (and the fact that you can't simply yank out the hard drive) is the only thing standing in the way of the iPhone functioning as a complete, portable Mac OS X computer. Fortunately, many free tools have been written to make the jailbreaking process simple.