Good news! The iPhone 1.1.1 file system has been broken open as a result of two iPhone hackers inserting symbolic links into the file system of a 1.0.2 iPhone before updating. And with file system access, it means we’re one step closer to activating, then jailbreaking, and then enabling third-party applications. Erica at TUAW is liveblogging her progress, and we’ll update this post with more info as it comes in. TUAW

Update: The current status is file access, but no executable access and no shell access. This means that although you can look, you can’t run apps. With a little file fiddling, that should come very soon.

Update 2: Any dreams of using the Wi-Fi music store on 1.0.2, effectively negating one big reason to upgrade, have been squashed. It doesn’t work.

Update 3: Pash from Lifehacker tells us the whole third-party app scene has been totally quiet since the 1.1.1 launch. Both new apps and updates to old ones have been stagnant.

Update 4: They have read access to the entire disk, but write access is still limited.

More information [TUAW]