yeah, not only that, but the only way i fixed that problem was rolling itunes back to 7.7.0.
are your 3rd party apps working? when this happened to mine, all the 3rd party apps quit working too.
a guy posted detailed instructions on how to do it in a thread somewhere around here. if you search around you should be able to find it.
We live near an apple store so I took it to be seen by a genius and he asked if I was using xp as it was a common problem but he slwas suprised when I told him I was using an iMac. After he checked out the diagnostics and offered a replacement which I accepted.
I had the exact same problem while running iPhone firmware 2.0.1 and iTunes 7.7.1, but was able to resolve my issue. Here are the steps I took:
1. Delete all apps from iPhone.
2. Disconnect and reconnect sync cable to create backup.
3. Reinstall all apps.
4. Repeat step 2.
Surprisingly, all my iPod content (audio/video) was able to be accessed at this time, as well as all 3rd party apps. I then upgraded to 2.0.2 without incident and was able to use my iPhone to its fullest, with the exception of upgrading my apps. I repeated the process detailed above and achieved success with upgrading apps via iTunes, at least thus far.
I also experienced the same issue on my 1st gen iPhone, but the steps above achieved a negative result. I then upgraded to iPhone firmware 2.0.2 and was able to access my iPod content (audio/video), but all 3rd party apps still crashed. I then repeated the process above and now everything works.
In other words, the steps above worked on an iPhone 3G on iPhone firmware 2.0.1, but for a 1st gen iPhone upgrade to 2.0.2 then perform the steps above and you should be fine.