From ModMyi - Wiki

This guide works for both the iPhone and the iPod Touch. Release Thread

PwnageTool is the latest and greatest tool released by the Dev Team in order to free your iPhone or iPod Touch. Great work by the dev team -- much respect and thanks. This tool is very different from previous jailbreaks that just use existing exploits to jailbreak the iPhone. PwnageTool takes control of the lowest levels of providing a safe jailbreak using Apple's reliable iTunes restore process.

The following guide will teach you how to use PwnageTool.

Before you start this guide you need to have a copy of pwnage. ModMyI Member Download | theiphoneproject.org download

You also need to have a copy of the 1.1.4 ipsw for you device. iPhone | iTouch

Before starting make sure you are currently running 1.1.4 (it wont work with any other version) on your iPhone / iPod.

Lastly of course you'll need your iPhone or your iPod Touch.

Start your iPhone / iTouch in restore mode by plugging it in and holding the sleep and home buttons until the apple logo comes up. Release the sleep button and continue holding the home button until the connect to iTunes screen is showing. Run PwnageTool and click Browse .ipsw

Select your iPhone1,1_1.1.4_4A102_Restore.ipsw or iPod1,1_1.1.4_4A102_Restore.ipsw file and select Open.

The console of PwnageTool will indicate that it has loaded your .ipsw

Now select iPwner. You'll see text scrolling in the console as it works.

The following menu will pop up. Select okay. Note that your iPhone / iPod Touch will be scrolling txt at this point. Don't touch anything :)

Eventually your iPhone will restart and show the new connect to iTunes screen. Your iPhone has been pwned! Leave it plugged in and continue to Page 2.