Solved.
I tried updating the firmware on the ATV2 and ended up with the screen to plug the USB into my mac. I tried multiple times with both a Macbook Pro and a new 27" iMac. I tried it through iTunes using an Amazon micro USB cable and also the Kindle micro USB cable. I also tried it both ways with and without the power cable attached to the ATV2. I got an error each time saying the ATV2 was not eligible for update and a blinking light.
This is finally what worked for mine.
I went into Windows XP with Vmware Fusion and installed a brand new copy of iTunes. I plugged the ATV2 with just the micro USB cable and let iTunes update the firmware. It worked.