I'm sure its very possible. The inside of the iPhone will probably look exactly the same as the chips will probably have to be very close to the same size. However, Apple will 99.9999% probably not sponsor an authorized upgrade. If you have it done it will void your warranty.
why is that a shame? you can definitely count on the flash size to not be the only hardware thing to change in version two so just changing the flash won't give you something as good as version two. imo.