The update works, but it requires your iPhone to connect to the iTunes store to re-activate. The iTunes store for reactivation is not accessible at this time (10AM eastern) so your phone will become a useless brick!
When I sync'd my iphone as I normally do, I got the popup for the 2.0 software, I said OK and walked the dogs. It has been trying to contact the itunes store for over an hour and is still unsuccessful.
WAIT A FEW DAYS BEFORE ATTEMPTING TO UPGRADE TO IPHONE 2.0!!!!
This one tip will help you sleep better tonight
A few seconds are all you need to get a better night's rest.