This issue is a complete pain in the ass if it’s your first time encountering it, but it’s actually very easy to fix.
This is done by simply deleting the ipsw file inside the following directory:
“c:\Documents and Settings\[your username]\Application Data\Apple Computer\iTunes\iPhone Software Updates”
Vista users, I believe yours resides in “c:\users\[your username]\AppData\Apple Computer\iTunes\iPhone Software Updates”
After you do that, just restart the restore process. iTunes should download the latest firmware for your device, which clocks in around 300 MB, so it could take a few minutes depending on your connection speed.
If you do not have an ipsw file in that folder and also happen to be restoring by choosing your own ipsw file (done by holding shift while clicking “restore” in iTunes), the file may be corrupt or invalid and you will have to do a normal restore. In my case, I kept choosing the 3.0 firmware ipsw that just so happened to be patched from when I had applied the jailbreak. The restore process didn’t like this file and gave me repeated 1604 errors, so I just let the restore process re-download its own version.
…and that’s it! The restore process is pretty much automatic from this point on.
