Somewhere in the process of upgrading the iPhone to the 2.0.2 software my system got stuck in a loop where iTunes wanted to set up a new phone (New Phone or Restore the iPhone to a previous backup).
I was able to get out of this weird loop by reading this thread and taking this action ... force closed itunes while I was restoring. Shut off/Reboot the phone. Start up itunes. Plug in the phone. Everything seems to be fine now.