If you get a 1600 or 16xx error while trying to restore to a custom 3.1 firmware for iPhone 2G or 3G, try the following :
Try this first instead of entering DFU mode…for 3G
1)UNPLUG ur iphone and turn off
2)Open itunes
3) hold home as u plug in iphone and keep holding until u see itunes logo on ur iphone
4) then SHIFT+restore and locate the custom ipsw
and there u go! (thanks txccu2000).

If that didn’t work, then try the following :

• Try rebooting both iPhone and PC/Mac.
• Make sure the iPhone is in DFU mode.
• On a Mac – BEFORE creating the custom ipsw, delete restore files found in ~/Library/iTunes/Device Support
• On a PC – Delete device support files (restore files) in iTunes folder in the following locations
• Windows 7 and Vista : C:/*UsersName*/AppData/Roaming/Apple Computer/iTunesDevice Support
• Windows XP : C:/Documents and Settings/*UserName*/Application Data/Apple Computer/iTunes/Device Support
• Try restoring to the custom firmware via iTunes by (shift+restore on Windows, Option + Restore on Mac)

Credit : Thanks Sandos for location of restore files in Windows OSes.