UPDATE: PWNAGE 2.2 is out, my success in using QUICKPWN 2.2 here.
UPDATE: PWNAGE 2.2.1 is out also, fixed the bug and I managed to successfully build a custom firmware!
Recently, I got a hold of a first generation iPhone that has never been unlocked, hacked (PWN'd), Pwnage, and/or ZiPhone'd. Its a "virgin" iPhone which comes with a bone-stock iPhone 2.1 Firmware straight out of Cupertino. Versus, my own first gen. iPhone which has seen different flavors of ZiPhone 1.3, 1.4 all the way to PWNAGE 2.0, 2.0.1, 2.0.2 and even 2.1.
Having my old iPhone's baseband pwn'd makes upgrading to new firmware an easy task. So easy that I did not even realize and I've taken the process for granted (all I had to do is simply press Option-Retore whenever I build a new custom firmware. That is, until I am up to the challenge to getting a custom firmware from PWNAGE 2.1 installed to this virgin iPhone 2.1. All hell breaks loose.
If you found this article because you Googled some combination of the phrases: "pwnage, 2.1, firmware, itunes, unknown, error, (1600)," then I'll cut right to the chase. I saw the same error messages over and over and I could not find any definite information. I just couldn't install the custom firmware in DFU or Recovery Mode. What ended up working for me is the following combination:
1. Practice and get real good at entering your iPhone into the real DFU mode. Normally it is said to hold power+home for 10 seconds, then let go power button (while still holding down home button) for 10 more seconds and your screen will remain black while iTunes prompts you an iPhone has been recognized in recovery mode. (If you entered recovery mode, which is not what ou want, the screen will be lit and show a picture of USB cable connecting to iTunes logo). I had a hard time getting my iPhone into DFU mode and here is the trick I found with iPhones with firmware 2.1 - IT NO LONGER TAKES 10 SECONDS before you release the power button. If you hold it for that long, you'll notice the apple logo lit up (and you are never suppose to see that logo). By my count, I think its about 8 to 9 seconds. Keep practice a couple of times, and pace your counting. Note when does the apple logo come up and try releasing the power button right before then while holding down home button (this is a very important step for later). If you get your phone stuck in the "Recovery Mode", I've managed to get it back to normal mode or DFU mode, but I can't retrace my exact steps. Its a combination of holding power button for a few seconds to turn screen off, then hold both Power+Home for 8 to 10 seconds and releasing power (much like DFU mode) to get it back to normal mode. I tried about 50 times to do this tonight and I honest forgot all of the steps. Worst case is do a real restore which takes about 10 minutes each time on iTunes 8.0 (some how it won't let me do it via 8.0.1).
2. Download QuickPwn from the iPhone Dev team blog (1.1 version for mac which is what I used, not sure about the PC version). Get your iPhone to normal mode and launch QuickPwn. Follow on screen instructions as it does its thing (building custom firmware, settings, etc...). When QuickPwn asks to help you get into DFU mode, remember what I said in step one, get good with your own timing to enter DFU mode; QuickPwn still thinks DFU mode requires 10 seconds and if you follow their onscreen que with sound (which can be very distracting if you are doing your own counting up to 8 seconds - I suggest mute your pc speakers and turn your head from the screen while counting) you'll end up taking your phone into Recovery mode which will cost you more time to prime your phone back to step one again. After entering DFU mode successfully with QuickPwn running, you'll be noted that it is now doing its thing to unlock and hack the baseband as well as the firmware on the iPhone.
3. After step two has been completed, I noticed my iPhone is unlocked and I can do whatever I want, except for one thing - get a phone signal for my SIM card (zero bars!). So the natural next step is to launch iTunes and do the ALT-Restore via a custom 2.1 firmware I built with PWNAGE 2.1, and this time, no more error 1600 and after wards, the iPhone works perfectly.
Finding definitive answers on these topics are getting more and more difficult, I knew I was frustrated and just glad I got this new iPhone to work with PWNAGE customer firmware 2.1. I can't guarantee if this will work all the time so good luck to you. And please note that anything you do via custom firmware or hack can potential cause you to brick your iPhone; so please think it through and take your time. Don't panic if something seems to have gone wrong, as for my experience holding down the power+home button in various combination or time generally brings control back again.
[Update: I noticed after pwnage 2.1, the phone will not awake from sleep mode (when you power off the LCD for more than 30 seconds) causing me to miss calls, more info describing my problem here. The solution is to run a program called "Insomnia".