You can use an iPhone with any firmware, just restore (has less issues than updating, but you'll lose your data) to 1.1.4 with iTunes first. This method will leave you with 1.1.4 firmware but 04.02.13_G baseband. There is a tutorial that I have linked to at the bottom of this tutorial. It will help you install the Installer (and fix common issues) and addresses EDGE compatability.
Connect your iPhone to iTunes and restore to 1.1.4 firmware. Eject the iPhone from iTunes when it is finished. Make sure iTunes is closed! Also open Activity Monitor and ensure that iTunes Helper is not running. To do this, go to your Mac's Applications folder, then into the Utilities folder, and you'll find a program called Activity Monitor here. Launch it. At the top there is a drop down box. Make sure My Processes is selected. Now look below for iTunes Helper. Select it and click on Quit Process at the top.
At the pop up that appears, select Force Quit. You can close Activity Monitor now. iTunes Helper will not respawn until your computer is restarted.
Download iNdependence here. If you have any problems with this process, then read the iNdependence known issues page here for a solution.
Launch iNdependence. You'll be at the main screen. Click the Activate Phone button.
You'll get a progress bar while the RAM disk is created.
If you get this pop up next (error entering recovery mode), then close the program and relaunch it.
You'll be at the main screen again. Click the Activate Phone button.
The graphic on your iPhone should change from the image with a "slide to unlock bar" to the image without one.
The message Waiting for jail break... will appear.
Code will fill the screen and begin scrolling by quickly for a minute or so.
The iPhone will now reboot and you will be at the slide to unlock screen.
You'll get the success message when it has completed.
You will now have this status information in iNdependence "successfully activated phone". Close iNdependence.
If you went to your About screen, you would see you are on 1.1.4 firmware and 04.04.05_G baseband.
Press Settings, General, Auto-Lock and select Never. Go back to Settings and put the iPhone into Airplane Mode.
Launch iNdependence. To unlock the iPhone, click the SIM Unlock Phone button.
A pop up will appear next, make your choice.
You'll next see the Waiting for SIM unlock... message.
Note: if the iPhone stays at the SpringBoard and does not reboot within 60 seconds, then you need to close iNdependence (most likely force quit via the Activity Monitor in the Applications/Utilities folder) and do it again.
The iPhone should reboot and show the connect to iTunes graphic. Then the screen will fill with code which will scroll by for a minute or two.
The iPhone will reboot when the process has finished. My first time doing this I got a failure message. Don't worry, just click the SIM Unlock Phone button again. A success message will appear. Slide to unlock and enjoy.
You should continue on to this page to install SSH, install the Installer, and fix any issues you may have with EDGE compatability. (read below)
Note: sometimes iNdependence will say it unlocked the phone succesfully when it has not! During one of my unlocks i received the "repair needed" message and lost Wi-Fi in the Settings screen. The phone was far from unlocked. No problem, just rerun the SIM unlock process again. I can attest to two instances where this same problem happened, and this solution worked both times.
You will notice when you connect to iTunes that you have up to 200mb of data classified as "Other". I believe this is the 1.1.4 firmware. If I find out differently, I'll update this and see if the space can be reclaimed.