IPod Software Update failed with iTunes 7

Just installed iTunes 7 and after connecting to my iPod it wanted me to update to firmware 1.2 but everytime I click on download it fails.
"iTunes could not contact the iPod software update server because you are not connected to the Internet."
That is very funny because without the internt iTunes wouldn't even be able to get the information that an update is available....
So the diagnosis doesnt help anything either but I am posting it, maybe somebody has a idea:
Microsoft Windows XP Home Edition Service Pack 2 (Build 2600)
Acer Aspire 3020
iTunes 7.0.0.70
Current user is an administrator.
Network Adapter Information
Adapter Name: {06AAC6DC-F406-423E-B7A6-EF5E6FC83222}
Description: Broadcom 802.11g Networkadapter - Packetplaner-Miniport
IP Address: 192.168.0.4
Subnet Mask: 255.255.255.0
Default Gateway: 192.168.0.1
DHCP Enabled: No
DNS Servers: 192.168.0.1
Network Connection Information
Active Connection: (none)
Connected: No
Online: No
Using Modem: Yes
Using LAN: No
Using Proxy: No
SSL 3.0 Support: Enabled
TLS 1.0 Support: Enabled
Firewall Information
Windows Firewall is off.
Connection attempt to Apple web site was successful.
Connection attempt to iTunes Store was successful.
Secure connection attempt to iTunes Store was successful.
Current firmware version is 1.1.1
  Windows XP  

I just downloaded itunes 7 and connected my 60gb ipod. It updated songs and offered me the chance to get CD covers, which i did successfully. It the offered me Ipod updater 1.2 which i said yes to but it then informs me that it could not complete as ipod already in use by another application!!! I tried to reset but with the same result...help please

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