the problem with the error message <your device> could not be restored is basically the verification server at apple is overwhelmed  (gs.apple.com) -- you can eventually get it to restore -- you just need to keep trying manually if you cant wait -- to do so

this only works if you got the restore file already - iPhone3,1_5.0_9A334_Restore.ipsw if you dont have -- its going to take like 10hrs to download - if you do have it

1. get your restore file and put it on desktop so itunes can easily get it - its in <user>/Library/iTunes/iPhone Software Updates

2. in itunes - option restore and pick file "iPhone3,1_5.0_9A334_Restore.ipsw" - again make sure you have backup first

again you may have to try this like 20+ times -- its just getting itunes to connect to apple servers during a lull