It's been widely reported that a combination of efforts from the iPhone Dev Team and the Elite Team have led to a successfully jailbroken iPhone running 1.1.3. Third party applications were subsequently installed on the jailbroken iPhone and reportedly work fine. The video shown below demonstrates the jailbroken 1.1.3 iPhone with 3rd party applications. The video has been 'confirmed' to be legitimate by a variety of sources.
But, don't get excited. If you're one of the many iPhone owners who upgraded to 1.1.3 hoping to give it a shot and go back to your third party apps under 1.1.1 or 1.1.2, only to find out that you could not downgrade from 1.1.3 - you're remaining stuck, at least for the time being.
There are a couple road blocks between you and this 1.1.3 jailbreak. They are both deal breakers. First off, word is that the jailbreak requires a hardware modification to the iPhone. This means that unless you a) really know what you are doing or b) are crazy, you won't be attempting the hardware mod. Secondly, indications are that the team who put the jailbreak together has no plans to release it - at least not until Apple releases the SDK in late February.The great iPhone rumor mill does have some rumblings that the teams behind this initial jailbreak are working on an alternative jailbreak which they will actually release to the public. However, this tidbit, along with much about this jailbreak - is less than rock solid.