We knew this would happen weeks ago. Most of us knew that the iPhone was going to be locked down for third party applications as well as SIM unlocks. It isn’t possible (currently) to jailbreak an iPod touch and the same can now be said of any iPhone running 1.1.1. iTunes no longer communicates with the iPhone, instead iTunes listens for commands sent from the iPhone. This means listening for keys is no longer possible, which means decrypting ramdisks is also no longer possible. The whole thing is a tremendous pain in the ass but absolutely nobody can say this wasn’t expected. Just deal with it and accept it; we all knew what we were getting ourselves in for.
Incidentally, if you do need to restore your iPhone, download this:
And alt-click the restore button in iTunes. You’ll be able to choose the firmware you wish to restore using.