From ModMyi - Wiki

Will not downgrade baseband, only will allow you to use as glorified iPod Touch.

1. Get a new version of iPhuc, they are everywhere. 2. Get 1.1.1 Restore file, http://www.modmyi.com/forums/downloads.php?do=file&id=1355 3. Extract said restore file. 4. Go to firmware-DFU in the unzipped file and get the WTF file. 5. Launch iPhuc, get a normal prompt, make sure iTunes is quit. 6. Type enterrecovery, quit iPhuc. 7. Relaunch iPhuc, enter filecopytophone followed by the path to the WTF file you extracted in step 4, enter return then cmd go. Quit. 8. Launch iTunes, hold Shift(PC) or Option(Mac) and select the 1.1.1 IPSW file. Not unzipped, If your screen goes white, thats good :) 9. Getting an error is normal (1015) just launch INdependence or iBrickr to kick it out of recovery mode, or type cmd fsboot from iPhuc, follow standard jailbreaking/activating from the guides.

Kudos to Erica Sadun from TUAW for this, i just reworded it to try to make it more user friendly :)