Okay. I spent all day trying to upgrade the old iPhone to the new 2.0 firmware. Now…I uninstalled iTunes, reinstalled iTunes, it didn’t make any difference. So here’s a handy tip to save you time.
Unplug ALL USB devices except your iPhone. If you have a computer with a USB port in the front, use a USB port in the back.
As soon as I did this I was able to upgrade immediately.
Hope this helps.