After a little more digging, i found this interesting comment by John Gordon, the suggestion in simple terms is to reset the iPhone and restore immediately, followed by a re-sync.

Full instructions can be found on Johns blog here: http://tech.kateva.org/2008/09/iphone-21-does-not-fix-unknown.html .

This is done using the latest version 8 iTunes and iPhone firmware.

So far, so good, all data is back, unfortunately all the icons have been repositioned, its a shame apple can’t retain the position of the icons. Data and passwords seem to have been retained.

Everything seems updated, so this is probably the best solution at the moment, i’ll give some more feedback after a few applications have been updated. The true test.

[UPDATE 20th Oct 2008]

Looks like this has worked, i upgraded 5 applications over the weekend, everything is still working correctly.

[UPDATE 28th Oct 2008]

All still working fine, more updates have been aplied – looks like this does resolve the issue.