Yeah, the second step is to "shift-restore via iTunes using a custom ipsw for your model iPhone made using pwnage tool"

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iPhone 3GS 32GB factory unlocked (3.1; Pwnagetool, Cydia, OpenSSH)
iPhone 8BG (3.1.2; Pwnagetool, Cydia, OpenSSH)

I tried to use blackra1n to jailbreak my iPhone 2G before I isntall the custom firmware made using pwnage tool. But blackra1n keeps getting stuck at the recovery mode screen. I am using Windows 7. I set the execution of blackra1n.exe to run as administration mode and in Windows XP SP3 compability. But it still gets stucks.

Everytime it gets stuck in Recovery screen, I have to let the battries drain from my iPHone before I can retry. I install iLiberty 1.3.0.113 to help me exit the recovery mode, but for some reason it won't pickup my iPHone and even allow me to click any buttons.

You are using blackra1n rc2 aren't you? RC1 had huge problems with 3G iPhones.
Blackra1n rc3 comes out in 2 days, maybe that will help a bit.

Try Windows Vista SP2 compatibility mode instead.

I am also running windows 7 (x64 edition) but have not had time to re-jailbreak my iPhones recently. I also use my mac for most of my jailbreaking because pwnagetool is so powerful.

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iPhone 3GS 32GB factory unlocked (3.1; Pwnagetool, Cydia, OpenSSH)
iPhone 8BG (3.1.2; Pwnagetool, Cydia, OpenSSH)

Ignore my old post, I got it to work!!!

So for all those people that are having the same problem as me, I am going to sum up how I managed to hactivate/unlock/jailbreak the iphone.

My Problem: I wasn't able to access DFU mode. I don't know why (could be hardware issues due to water damage) or previously installed firmware... I was able to access recovery mode.

Solution:

1. Go to recovery mode then update the firmware using iTunes to 3.1.2
2. Use blackra1n to jailbreak the phone. Jailbreaking using blackra1n won't hacktivate it, it will just allow you to install custom firmware.
3. Using pwnage tool, build a custom firmware for 3.1.2, if you don't have a Mac, just google "iphone custom firmware 3.1.2"
4. Go back to recovery mode, then in iTunes, hold down "Shfit + Restore" and browse for the custom firmware you made.

Hey all. I have the same problem with the broken home button on my 3G iPhone. I'm on the latest firmware bundle and need to jailbreak badly. 5 months of using the power off button to navigate blows. I've seen two possible ways to enter into DFU mode on this thread-blackra1n and the unzip firmware and modify file thingy. Which one is better/more efficient?? I've jailbroken before and created custom firmwares before, so I am somewhat familiar with the pwnage process, but not well versed in the technical aspects of modifying files. Would some kind soul be willing to put down a step-by-step tutorial on how to complete this process with the most efficient procedure? Thanks!

Is your iPhone jailbroken now? What model is it? Are you on windows or mac?

__________________
Please read the stickies and search the forum before posting!
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iPhone 3GS 32GB factory unlocked (3.1; Pwnagetool, Cydia, OpenSSH)
iPhone 8BG (3.1.2; Pwnagetool, Cydia, OpenSSH)

Ha. Sorry, forgot to include that business. iPhone 16 GB 3G is not jailbroken. I'm running firmware 3.1.2 on a Macbook with Snow leopard. Thanks.

Well, if you are on a mac, both paths are available.

I would recommend blackra1n to be honest. If you are on a legitimate contract, that is all you need to do.

If you are not on a legitimate contract, still use blackra1n to jailbreak and then use pwnagetool to make a custom ipsw with activation on, say your iPhone has been pwned already and then option restore the iPhone in iTunes. This gives you better hacktivation than blackra1n offers by itself but saves you fiddling with DFU.

Both methods actually do not require you entering DFU mode at all.

__________________
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iPhone 3GS 32GB factory unlocked (3.1; Pwnagetool, Cydia, OpenSSH)
iPhone 8BG (3.1.2; Pwnagetool, Cydia, OpenSSH)

Hello Zythyr, just to be clear...to what Iphone (2g/3g) did you managed to hacktivate?

thanks