I didn't check Inca's link. But this is a summary of how the exploit works, from my understanding:
When Sega ported PSO to GC they left a big gap for the server setup. It seems that you are allowed to enter the ip of the particular server... which means if certain people tried, they could design their own client software for sending different information. Through this technique a small program can be sent to the GC to be executed, which in turn is equipped so you can transfer games to and from the GC.