The unlock requires physically removing the back of the Iphone, and soldering a wire and a switch onto a single trace on the back of the circuitboard. Bypassing this trace allows access to the boot emory on the phone which is used to send commands down to the flash storage on the device. Those commands allow for the carrier lock to be patched.
If you're not skilled with a soldering iron, however, you're going to brick your Iphone and be left with nothing more than a very expensive paperweight. The hack also requires better-than-average software skills - apart from 'jailbreaking' the phone to run third party applications, there's a fair amount of Unix work to be done to the phone, too.
The holy grail of the Iphone, software only unlocking, appears no nearer. Recently, fans have been buying so-called Turbo-SIM cards that allow the hacking up of the standard AT&T SIM card with local network cards for unlocked access. This hack bypasses the need for SIM card hacking, but is probably rather more complicated regardless.
You can find the group, which calls itself Finding JTAG, over here. Be careful. µ
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