ITunes sees existing iPhone as a new device!

Hi, my first post here but I have been lurking for some time!
A friend asked me to update his and his wife's iPhone's (both 3GS) to iOS 5 (currently on 4.2.1). I popped round to do it this but every time I plug his iPhone in, iTunes sees it as a new device and wants to either set it up as a complete new iPhone or use the backup of his wife's iPhone or kids iPod touch to restore it. It can't find a previous backup for the device despite the fact that the iPhone was set up on that PC. It would appear they've never previously updated their phones since originally setting them up but all the same, I'd expect iTunes to recognise the iPhone?
Has anybody else had this happen before? Obviously I want to take a backup before installing iOS 5 but if I let iTunes set it up as a new device will it wipe the phone or will it recognise there's stuff already on there and back it up? Apps and music aren't an issue as they're in iTunes but he needs his contacts, SMS etc restored. AIUI If Apple replace a phone they back up the old one first and restore it so how do they do it? I don't want to click on 'Continue' and have iTunes wipe the iPhone!
As a test I've just installed iTunes on an XP PC that I've never connected my iPhone to before, backed up the iPhone first and plugged it in. iTunes reconised the iPhone and know everything about it, however I'm not sure if this is because I've already upgraded my phone to iOS 5 and it's backed up to iCloud?
I've tried Googling but not found anything useful so far. Any help would be appreciated!

Bump! Anybody got any ideas on this at all please?

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ITunes sees existing iPhone as a new device!

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