Hi,
I had the same problem today. The iPod Mini 1st gen I ve just bought was stuck at the same step of the update. Even plugged in an 5 Volts USB wall charger, nothing happened...
The reason of this is that the old iPod wall charger delivered 12 Volts by Firewire and not 5 !
In fact, at this step of the update, my iPod wanted to receive 12 Volts and not 5. Without having such a power supply, I had to modify the original 30-pin dock to send 12 Volts in the right pins !
Now my iPod is fixed :) http://i58.tinypic.com/28srp07.jpg
Hope this helps all you guys fix your ipods.
(English is not my mother language so be kind :) )