I plugged my iPhone1 in and was prompted to download the 2.0 software update, but it didn't download and no when I click \update' it says the version I have is the latest version.
I had the same issue. I just shut down iTunes and restarted it and then checked for updates and voila-- I now have a bricked iPhone. My recommendation is don't even bother with updating right now because you are better off with 1.1.4 than a phone that just makes emergency calls (if you weren't already aware, there are some major upgrade issues after you get 2.0 installed). Try again later tonight or tomorrow... hopefully things will improve by then.
That happened to me earlier and I was a mug who decided to install 2.0
Advice: Do not install 2.0 tonight at least, thank the lord you have a phone that works, rather than an pretty brick and the repetitive sound of a network error