iOS Jailbreak – Do Apps Have Uncontrolled Access to Data

First of all, Erase All Content And Settings on a pre-3GS phone is slooooooooooooooow. In fact, while it is happening, only the Apple logo appears on the screen. (It may still be running) From HT2110:

This process can take several hours, depending on the storage capacity of your iPhone or iPod touch. During this time, the device displays the Apple logo and a progress bar.

Second of all, anytime you have an error message when restoring an iPhone, TS1275 is your best friend.

Error 1015: This error is caused by attempts to downgrade the iPhone, iPad, or iPod touch's software. This can occur when you attempt to restore using an older .ipsw file. Downgrading to a previous version is not supported. To resolve this issue, attempt to restore with the latest iPhone, iPad, or iPod touch software available from Apple.

Sounds like you want to restore to a more recent version, worst case just get the most recent jailbreak instructions with the most recent software that supports your hardware from the Dev Team Blog.

I hate to say it, but in all my years of jailbreaking I have yet to see any type of malware have any real impact on the iOS community. Sure there was the infamous SSH vulnerability, but that was patched rather quick. That's the beauty of jailbreaking; we don't have to wait for Apple to release a fix. Most people fear that jailbreaking is insecure and puts your device at risk. That's far from the truth. My favorite example is the jailbreakme.com PDF exploit for iOS 4.3.3. At the same time they released the exploit, they pushed a patch to Cydia. As soon as you jailbroke, you were advised to install the patch, so that your device could not be further compromised. It took Apple a lot longer to implement and roll out their fix. In that situation, it was better to jailbreak than to not, because unless you had the patch, someone with bad intentions could have abused the exploit and done anything they wished with your device. Sure, you can be careless and install some malicious software, but most of the time it's the user's fault, because you always should be careful with what you do in a limited-regulation environment. As a final answer to your question, there were a few PDF exploits that were triggered merely be visiting a website (jailbreakme.com), but those vulnerabilities were never used for evil.

Edit: Another malware example has popped up, but it's not specific to jailbroken devices; it can remotely jailbreak any device without user interaction. This is the first time we've seen a remote jailbreak being used in the wild for malicious use. Apple has already patched it - they patched it quick. But the jailbreak community took a few months to patch it.