Sometimes, bad upgrades happen. Multiple users are reporting an error 3200 or 3002 when they try to upgrade to iOS 5, or getting a warning about ineligible upgrades. Some others are encountering other scary, silly, or exasperating iTunes hurdles on the path to bringing your iOS device into the latest firmware.
The 3200 and 3002 errors are the most pernicious and widespread of the problems we've heard of today, and they're most likely due to Apple's servers being overwhelmed by literally millions of users all trying to upgrade at once. Personally, my 10.7.2 upgrade has had "About 3 hours left" now for, well, hours.
You can spend the rest of the day tearing your hair out over this... or you can take a few deep breaths, take a break, put down the iPhone, and go do something else. The chances of everything resolving quickly over the next hour or two are slight.
Relax, go outside, breathe some air, give thanks for your blessings, and try again later tonight or maybe tomorrow. iOS 5 and iCloud will still be there.