There are instructions to downgrade to 1.0.2 - perhaps you should follow those and hold OPTION while clicking RESTORE and selecting old firmware.
This slightly easier version uses AppTapp installer instead of requiring you to decrypt the DMG file yourself.
(from iphone.unlock.no)
First, download the file iPhone1,1_1.0.2_1C28_Restore.ipsw from Apple. On a Mac, do not unzip the file, iTunes will do this for you in step 4.
Then connect phone to dock, and hold down home button and power button for about 10 seconds or until the screen goes black.
Now release the power button but continue holding the home button. After about 10 seconds the computer will detect the iPhone in restore mode, and iTunes should tell that the phone needs to be restored.
Hold down SHIFT key (Windows) or Option/ALT-key (Mac) when clicking the Restore button, and select the file you downloaded in step 1.
Let the restore complete and ignore the error at the end. (Should be error 1013).
Now your phone should show the "Please Connect to iTunes" screen with the yellow triangle.
Run AppTap to jailbreak your phone - it will restore it to a working 1.0.2 firmware it even though you will get an error at the end. Just dismiss the error and quit the installer.
Run AppTap again to actually install the installer.app. It should successfully complete. Keep rerunning AppTap if it doesn't work the first time - it may take a few tries.
At this point you will have a jailbroken iPhone that still needs to be activated (as usual). Google is your friend.
AT&T Users: Reset your iPhone before you start using your phone again. Failure to do so may result in you being charged for your "free services."
Please note: The Sync cable and itunes logo is the new firmware restore screen. The yellow triangle is the old restore screen.
Error: The iphone "xxx" could not be restored. An unknown error occured (1).