Upgrade to ps3 firmware 3.01 and now it won't play games.

The error code is actually one of two things, a) a faulty sector on the internal hard drive, or b) a faulty installation of software/firmware, both iterations actually coincide with eachother. If the hard drive suffers a faulty sector ( a section of damaged space on the drive that data may have been written to that no longer is readable), an installation may still be processed, and even work, but the error can cause some serious side effects, such as option b. If your PS3 has installed an item incorrectly, including firmware, it is in high risk of receiving this error.
Basically, what is occuring is the corruption of game disc recognition and execution. If you will notice, in 90% of all cases, the drive will still play DVD and even Blu Ray movies with no problems. When trying to start a game however, the title, sooner or later, will receive the error.
1) Ensure that your internet connection is stable. If you are using a wireless connection, make sure your signal is at least a solid 80%. If not, make the proper adjustments until it is.
2) Dust your machine regularly. Any PS3 owner will tell you that the Playstation 3 is a dust magnet. Just run a dry cloth over it every couple days, and you should be fine. This will help prevent heat issues and shorts that may occur.
3) When installing firmware and/or software, make sure you follow the instructions. Even if you have installed 6 versions prior, each one is different, and may require additional steps. Save yourself the headache and just follow them, it only takes a minute or so longer to do it right.
Lets sum it all up, the error is not hardware related and is caused due to corruption of firmware. Restoring you PS3 will not roll back the firmware, and unfortunately will not fix the issue 9 times out of 10. If you are receiving this error, contact Sony for a replacement unit.