Flash CyanogenMod custom rom
The phone must be in recovery mode (check previous step).
Activate the HBOOT mode by clicking on the power button.
Then with volume down, move on the recovery menu and click on power.
First download the latest Cyanogen ROM at:
http://wiki.cyanogenmod.com/index.php/Latest_version#Current_Stable_Version
It should be something such as "update-cm-5.0.6-N1-signed.zip".
The download the Google android applications at:
http://forum.cyanogenmod.com/index.php?/topic/150-cyanogenmod-for-nexus-one-v506-04152010/
It should be "n1gapps-EPE54B.zip".
Copy these two files at the SD card phone root by using for exemple the recovery menu "USB-MS Toggle" while connected to the computer.
Then backup the current ROM going into the recovery menu:
Backup / restore -- Nand backup
Click on volume down to exit the Nandroid backup menu.
Wipe from the phone the existing data by using the recovery menus:
Wipe -- Wipe data/factory reset
Wipe -- Wipe cache
Wipe -- Wipe dalvik-cache
Click on volume down to exit the Nandroid backup menu.
Finally install the ROM and the google application from the recovery menu:
Flash zip from sd card
First select the "update-cm-5.0.6-N1-signed.zip" file, then do it again with "n1gapps-EPE54B.zip".
Before rebooting the phone, finish with the following step in order to activate app2sd.