Watch GeeK.dll's video before proceeding, it will give you a good idea what to see.
1) Your phone will be asking you to Activate, slide to reach the dial screen and enter *#307# and press call.
2) Your iPhone will ring, erase the numbers on screen and press 0 and hit call again then answer
3) Press Hold and your phone will ring again.
4) Press Decline and you should be at the contacts screen.
5) Add a contact with any name and add the URL as prefs://1F, save it and click the URL from the contact.
6) You should now be in your settings menu where you can add your WiFi security information.
7) Go to General > Autolock > and set it to Never
8) Press the Home Button and you should be at the Activation screen, Slide and dial 0, hit call, answer, hold, and then Decline
9) Now you should add another contact and enter the URL: http://jailbreakme.com and save the contact. Then click the url of the new contact.
10) At the bottom of the page, click Install AppSnapp. It should bring you back to the Activation screen, and will take up to 5 minutes, so do not touch or do anything.
11) Once your iPhone gets a confirmation call, answer it and the iPhone will freeze.
12) Hold down the Power button and restart it.
13) If it was successful, you should be on your home screen and you should see the Installer app icon there.
Congratulations, you have Jailbreaked and Activated your iPhone. You may now proceed to unlock your phone if you plan on using it on a different carrier. If you are planning on using it on your old Cingular\AT&T plan (without the iPhone data plan), you are done!
Note: If this method does not work for you (freezes and doesn't work after reboot), either restore 1.1.1 and try it again or use one of the other jailbreaking methods.