From ModMyi - Wiki

This is directly from the readme included in the dev teams jailbreak archive. I will polish this up with screenshots when I have time . . . unless someone else gets to it first

  NOTE: In order for afc to start, you must BOOT the phone with 
        lockdownd v1.1.1, so do not reboot the phone during this process. If 
        you have no choice, copy lockdownd v1.1.1 back after, then reboot 
        again to make sure afc comes up.

1. Back up v1.1.1's lockdownd:

      cp /usr/libexec/lockdownd /var/root/lockdownd.1.1.1

  Now overwrite the iPhone's copy with your old v1.0.2 copy:

      cp /var/root/lockdownd.1.0.2 /usr/libexec/lockdownd

  And upload the certificate included in this distribution:

      scp iPhoneActivation.pem root@[IPHONE IP]:/System/Library/Lockdown/

  Now:

      killall lockdownd 

  This will restart lockdownd with v1.0.2's version

2. Download iASign from http://iphone.fiveforty.net/wiki/index.php/IASign

  bunzip2 iASign-v0.2.tar.bz2 

  tar -xf iASign-v0.2.tar

  cd iASign/bin

  
  Overwrite iASign's iPhoneActivation.pem with the one provided in this package

      cp /path/to/1.1.1-jailbreak/iPhoneActivation.pem /path/to/iASign/bin/

  Now run: ./iASign.mac --automatic iPhoneActivation_private.pem

  After a while, it should complete and say "New State: Activated", but it 

  doesn't really work. Don't worry, we're almost there!

3. Now copy the v1.1.1 lockdownd back and restart it:

  cp /var/root/lockdownd.1.1.1 /usr/libexec/lockdownd

  killall lockdownd

4. Run iAsign once more:

  ./iASign.mac --automatic iPhoneActivation_private.pem

  It should look like this:

   Activating...

   InvalidActivationRecord

   New State: Unactivated

  Don't let iAsign fool you, the phone is now activated.

You've now successfully jailbroken your iPhone and set up shop. Congratulations!

Before you can sync, you will need to remove the symlink you created:

rm /var/root/Media
mv /var/root/Media.old /var/root/Media