1) Anything. The latest version IIRC is 5.3.7.3 and that can still be jailbroken via the traditional poison filename.
Just see NiLuJe's jailbreak thread with full instructions.
2) Find cool hacks to use!
Some of my favorites: LibrarianSync (a collections manager), screensavers, kterm (terminal shell)
3) Install KUAL from the sticky thread, and then look through the linked master list of extensions. Most hacks are packaged as KUAL extensions.