Where are the million missing iPhones?

When Apple released its quarterly earnings numbers last month, the world was stunned by the vast discrepancy between the number of iPhones sold -- 3.7 million -- and the number of iPhones that had been registered with the company's exclusive iPhone service provider,AT&T -- about 2 million.

Some were sold in European countries where Apple had already launched with carriers O2, Orange and T-Mobile. Some may be sitting unsold in AT&T's inventory. But thousands are indeed being sold on the gray market by companies that buy them straight from Apple.

A stack of about 60 iPhones sat in the office of New York City-based cell phone import/export business Wireless Imports on a Tuesday night in February, ready to be shipped to a supplier in Hong Kong who would unlock and then resell them on the gray market in China.

Wireless Imports has shipped iPhones to countries far and wide including Switzerland, Belgium, Australia and Saudi Arabia, and before it was launched locally, to the U.K. and Germany. As Apple makes $120 on each iPhone that Wireless Imports buys, it's unlikely the Cupertino, Calif.-based company will go after it any time soon even though each sale represents a chink in Apple's armor.

Wireless Imports, which does business solely through its Web site, has sold between 500 and 1000 iPhones overseas each month since its launch, said senior sales associate Shawn Zade, and about 100 iPhones to customers in the U.S. who want to buy unlocked iPhones to use on T-Mobile.

The company ships iPhones unopened overseas, but uses a combination of software and SIM-card tinkering to unlock phones in the U.S., adding a $179 orange plastic card.

The cards are the same size as SIM cards, and when your sim card is cut to allow space for a small chip on the orange card, it dupes the iPhone into thinking its working with an AT&T SIM card.

The chip comes in a small, generic plastic bag and reads "Made in Thailand" with no other markings. Wireless Imports also sells the cards themselves to anyone wishing to unlock their iPhones. "Right now this is the only way to unlock an iPhone," Zade said.

The chips are a response to Apple's 1.1.2 software upgrade for the iPhone launched in November, which closed loopholes that allowed users to unlock the phones with a simple software program, said Zade.

Updating to Apple's 1.1.3 iPhone software, he said, will re-lock the phone and users will have to re-install 1.1.2, losing out on the enhancements like its pseudo-GPS application which uses a combination of cell phone towers and Wi-Fi hotspots to pinpoint an iPhone's location.

The hacked phones are reliable, Zade said. "The only way it would brick is if you upgrade the software."

Wireless Imports may have been one of the first gray marketers of the iPhone, Zade said, shipping 30 to Hong Kong the day the product launched last summer after waiting in line and buying them directly from the Apple store in Manhattan. In response to unlockers hackers, Apple limited iPhone purchases to 5 and then 2, but that hasn't stopped them or in any way hindered their ability to get iPhones, Zade said.

"There's a loophole in their system that we won't give up," he said, "but we have a way of getting pretty much as many iPhones as we want."