After years of updating my Apple TV's without a problem, I ran into this today, too, with my 2nd Gen. Apple TV. When I went through the Update process, and clicked the button to begin the Update, I got the usual screen showing Update progress. But, then it just stopped. The little gear went round and round and nothing further happened, for about 10 minutes. When I clicked the button again it asked if I wanted to stop the Update process and gave me an option to try again later.
I went through this two more times, each about an hour apart. Nothing but spinning gear with no other progress. So, I backed out of the Update process again.
Then, on a whim, I went to the Menu and clicked on "Restart" (not "Reset"). After the Restart process I went back to try the Update. This time my ATV2 came back and said the Update was not available at this time, but I should try again later.
I tried Update one more time. Lo and behold the ATV2 marched right through the process, and quickly. All is done now.