From ModMyi - Wiki

This guide explains how to Activate, Jailbreak, and Change the Root Password for your iPhone on 1.1.1 firmware.

To complete this, you must have followed this method to upgrade to 1.1.1. If you got your iPhone and it is already running 1.1.1 fresh out of the box, you need to follow this guide.

NOTE: This method works fine, but there is a newer and easier method here.

Step 1. - Activate

Download (but do NOT run it yet) iNdependence 1.2.5. If you already downloaded the virginizing pack, then you already have it. its included in there.

Make sure your iPhone is connected to the computer, and iTunes is NOT running. Also open Activity Monitor (Applications/Utilities/Activity Monitor) and make sure iTunes Helper is quit - click it and click Force Quit if its active).

Now open iNdependence. At the bottom it should say its connected to the iPhone with 1.1.1 firmware. In the Activation tab, hit the Activate button.

You will see a message saying Waiting for jail break

iNdependence will ask you to restart the iPhone, do so now.

Then you need to do so again.

Step 2. - Installing SSH on your 1.1.1 iPhone

Under the SSH tab in iNdependence, click the Install SSH/SFTP/SCP button.

iNdependence will say it is Generating SSH keys...

You'll then need to restart your iPhone.

Twice. ;)

Now you'll have a Success message!

Step 3. - Change the SSH Password

In the SSH tab of iNdependence again, hit Change Password. This will help to ensure no one hacks into your iPhone.

Type in root for the Account name, and whatever password you'd like to change to.

All right! You will see a Success message!

All right, we're all set and ready to mod your 1.1.1 iPhone! If you're planning on unlocking, continue on to the unlock guide for 1.1.1.