OK. I just upgraded to the new OS (3.0) after a number of failed tries.
First, the fact that I needed to back-up my iPhone first ticked me off. It took iTunes more than 12 hours and by the morning it was just half-way done. Since I can't live without my iPhone, I was looking for a way to skip this step.
So how do we by-pass backup? Apparently, I just needed an insider tip :)
Before we start, please make sure you have iPhone fully synched up with iTunes (you'll see why at the end)
1) Close iTunes.
2) If you have windows Vista, navigate to C:\Users\YourUsername\AppData\Roaming\Apple Computer\iTunes.
3) Make a copy of iTunesPrefs.xml.
4) Open the original fle in a text (or XML) editor (no WORD or wordpad!).
5) Search for "user pref".
6) Under the first DICT for the User Preferences section, enter the following:
7) Save the file.
8) Open iTunes and connect your iPhone if you haven't already.
9) Assuming you have already downloaded the latest OS file (about 230 MB), install the software.
It took me about 15 minutes to finish the upgrade.
Here are the gotchas (so you don't get scared):
1) When you start your iPhone, you'll notice that all your applications are GONE! Fear not, as all your apps are still available on subsequent pages (note the white dots that indicate the number of dashboard "pages" you have). If they are still not there, you just need to synch your iPhone with iTunes.
2) If you look under Messages (used to be SMS), you'll notice that you just see phone numbers, no names. If you go to Contacts, you'll see that probably most of your contacts are gone! Just be patient and let iPhone finish synchronization :)