Here was the step by step instructions that I wrote this afternoon for anyone else who is confused. I tried it with a few friends who also had the same issue and it worked perfectly. I also updated the Wiki pages for anyone who is new and still has the 1.1.1 firmware.
As of today I was still running the 1.1.1 update for my iPhone. I wanted to update to 1.1.2 now that 1.1.3 was out and was just going to wait until the new update was jailbroken before I updated to 1.1.3.
1. Make sure you have the 1.1.1 firmware.
2. Make sure it has been jailbroken. Visit: www.jailbreakme.com
from your Iphone and follow the on screen instructions.
3. Once the iPhone has restarted, open up the newly created Installer.app from your dashboard.
4. Click Install, go to Tweaks 1.1.1 and install the OktoPrep.
5. Download the 1.1.2 jailbreak software. Were going to need it in a bit: Click Here
5. Open up ITunes and download the 1.1.2 Firmware Here
6. Connect your iPhone and hold shift for windows users or option for mac users and click update.
7. Navigate to the downloaded 1.1.2 firmware file and click ok.
8. Let the iPhone reboot itself and when you see the Activate iPhone Connect to iTunes message, immediately click the eject button in iTunes. Failure to click eject resulted in me starting the process all over again.
9. Open up the jailbreak.jar file in the jailbreak 1.1.2 software we downloaded earlier.
10. Enable shell access if you want but click the jailbreak button. The software will go through a few steps and when your finished you should have a jailbroken 1.1.2 iPhone.
These are the exact steps I ran this afternoon and it worked perfectly. I never received any iTunes error.
Wiki Page for Jailbreaking 1.1.1 and upgrading to 1.1.2