After spending 2 days trying to figure this out, finally I found the easiest way to activate the iPhone.
Phase 1 :: Downgrade iPhone 1.1.1 to firmware 1.0.2
Firmware:
http://appldnld.apple.com.edgesuite....8_Restore.ipsw
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1. Start iTunes and plug in your iPhone which is running the 1.1.1 firmware.
2. Hold down the Sleep and Home button for 10 seconds. Allow the phone to power
off, but keep holding down the buttons. After 10 seconds, let go of the Sleep
button, but keep the Home button pressed until iTunes sees your iPhone. The
screen on your iPhone should be displaying nothing right now. OR Use iBrickr
v0.91 to help you get into DFU mode and restore v1.0.2
3. iTunes will ask you if you want to restore. Hold down Option or Alt, I forget
which (Shift if you are in Windows), and click restore. When iTunes asks you
what file you would like to restore from, navigate to your folder where you've
downloaded and saved v1.0.2.
4. When it completes, you will get an error. The iPhone will display the yellow
triangle on the screen. Leave iTunes open, and run AppTappInstaller and select
firmware v1.0.2. This may give you an error, but you should see the
"Activate iPhone" screen after.
6. Close iTunes. Press CTRL + ALT + DELETE, find iTunesHelper.exe under processes
and terminate it.
7. Now your phone should show the "Please Connect to iTunes" screen with the
yellow triangle.
PHASE 2 :: Running AppTappInstaller
AppTappInstaller:
http://www.nullriver.com/~adam/AppTappInstaller.exe
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1. Run AppTap to jailbreak your phone - it will restore it to a working 1.0.2
firmware it even though you will get an error at the end. Just dismiss the
error and quit the installer.
2. Run AppTap again to actually install the installer.app. It should successfully
complete. Keep rerunning AppTap if it doesn't work the first time - it may
take a few tries.
3. At this point you will have a jailbroken iPhone that still needs to be activated
(as usual). Google is your friend.
PHASE 3 :: iPhone + YouTube Activation
PACAY:
http://www.linkhider.com/Txc5
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1. Go to the folder where you extracted PACAY and start “(CLICK HERE) activate.bat”.
Follow the steps on your screen. When it asks to power the iPhone off and on
again: Hold the power button on the phone, slide the red slider, wait about 15
seconds and power the phone on again.
2. After this is done, you must reboot your iphone.
3. Insert the existing AT&T sim Card.
4. Congrats!
How To Reset Your iPhone
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Here's how to get yourself out of an iPhone jam.
If an iPhone apps seems to be locked up: Hold the Home button for six seconds.
This should bring you to Home.
If that doesn't work, try reseting your iPhone.
How to reset an iPhone?
Press and hold the Sleep/Wake button and the Home button until the Apple logo appears.