It took me a while to dig out the solution that worked for me:
- Upgrade to the latest version of iTunes.
- Flush DNS Cache.
Start command prompt and run:
c:\>: ipconfig /flushdns
- Disable FireWall and Anti-Virus software
The folder to place downloaded update is:
c:\Users\USERNAME\AppData\Roaming\Apple Computer\iTunes\iPhone Software Updates\
The filename of the recent update for me was:
iPhone3,3_5.0.1_9A405_Restore.ipsw