Use Lock only to turn on TDC and check the ship type you plan on sinking. Then click Break Lock and turn off TDC. You will then see the numbers 1, 2, and 3. Now you're set to set torpedo speed, depth, and magnetic or impact. Keep the scope's cross hairs on the part of the ship you want the torpedo to strike and then press Fire, and hopefully watch the fire works.
Play with this using a Historical Mission for practice until you know how it all works and you're sinking ships. Do Not use a campaign save for obvious reasons.
