I feel your pain but here is my question. When you activate the the Gen 1 iPhone through iTunes, your simply agreeing to a new 2 year commitment and has nothing to do with the upgrade status since you bought the phone at a non-subsidized price. Why would that mess with your status ?
It seems to be a computer automated response, just happens. In the computer's system, apparently, the only eligibility criteria is length of time since your contract start date. Somehow, on my account, when my phone was stolen, the rep made it so that the computer stated that I was upgrade eligible. Then, when I activated a new phone, it automatically cancelled that out. The reps told me yesterday that noone can do that in the computer, so who knows?? But, they did make notes that I am upgrade eligible, so hopefully I am OK.