1) Get the tools. Here's what you will need
A.) iPhone 1.1.4 Firmware
B.) iTunes 7.5 (windows or mac version)
C.) iLiberty (again, either windows or mac version)
D.) KiPhone (This is KEY! Thank you SO much kIREmk for releasing this! It is a patched version, available for windows or mac)
2.) Downgrade iTunes from 7.7 to version 7.5.
A.) Run the following commands: defaults write com.apple.iTunes StoreActivationMode -boolean NO
B.) defaults write com.apple.iTunes StoreGeniusMode -boolean NO
This will assist you in not getting those funky errors and having to re-authorize your iPhone every time iTunes detects your iPhone after each step
C.) Run the following command from a terminal session:
killall iTunesHelper
D.) Delete the following files by running the following commands while still in terminal:
sudo rm -r /Applications/iTunes.app
sudo rm -r /Library/Receipts/iTunesX.pkg
sudo rm ~/Library/Preferences/com.apple.iTunes*
This will prevent you from receiving any permission denied errors.
3.) Putting the phone in DFU mode.
I will reference this multiple times. So Im just posting it here.
A.) While still connected to the USB cable, power
off the iPhone by holding the power button for 3 seconds, then moving the slider to the right to complete the shut down.
B.) Next, hold the power (top of the iPhone) and home button simultaneously for *exactly* 10 seconds.
C.) Release the POWER button, but keep holding the home Button down, again for about 10 seconds (this is also known as DFU mode). Itunes will report back that a phone has been detected in recovery mode, although the screen is black. If iTunes was shut down, it will automatically open and report the said message.
If the screen shows anything else like a cable to iTunes graphic (tether), try again, you goofed.
4.) Option click on restore, it will ask you for the location of the iPhone1,1_1.1.4_4A102_Restore.ipsw file. Locate the file you previously downloaded and select it. Click open. Another option is to locate it from within your already downloaded images from when you originally updated your iPhone. The image file is located at: Users/(your username here)/Library/iTunes/iPhone Software Updates folder. There should be a few of them in there so make sure you select the 1.1.4 one, it is the only one that will work with this method.
5.) When the restore completes you should receive the error number 1015.
6.) After your iPhone reboots (after you clicked away the 1015 error), your iPhone will automatically go into recovery mode (not to be confused with DFU mode). It should look like a tether USB cable pointing to iTunes image)
7.) Open iLiberty and kick your iPhone out of recovery mode.
8.) Run the Kiphone utility and downgrade your baseband... VERY IMPORTANT: DO NOT iERASE YOUR BASEBAND. YOU CAN BRICK YOUR iPHONE!
9.) Restore your iPhone with the previously mentioned 1.1.4 restore image one last time
That's it!
Now if you want to unlock/jailbreak again feel free to do so with iLiberty
You are now the proud owner of a fully restored (and possibly) unlocked/jailbroken iPhone with the proper baseband. All is well in the Apple iPhone world again. Now, don't go updating your iPhone again until the iPhone Dev group releases iPhone pwnage tool 2.0
Have a nice day and remember to support your iPhone Dev Team!

Oh yeah, don't forget to download and update iTunes 7.7 again after you are done.