So Pwnage worked flawlessly in terms of jailbreaking my first gen iphone, but today I tried swapping sims and it prompted me to connect to itunes to activate.

Before, when I first ran Pwnage in expert, the only thing I changed was unchecking the "Activate the phone" box. I did this because my phone was already activated, and some guy had posted saying that's what you do if your phone's been activated before pwning.

Should I not have done this?

Also, my phone hadn't been Pwned before, and I clicked "NO" to "Legit iphone user"

Where did I go wrong?

You uncheck the "activate phone" box only if you are an existing AT&T subscriber.

Right, and that's why I did it, but I wanted to unlock so my phone would accept other sims as well.

Is this possible if I run pwnage again and tell it to activate the phone, or would that not be recommended?

Yes, make another ipsw with activation enabled. Activation info is stored on the phone, and restores destroys all information on the phone with a few exceptions.

However, stay out of expert mode in the future. You've lost your expert mode privileges with these two posts, I'm afraid.