When did you get your phone? I know t-mobile had G1s out of stock for a while (the whole Nov 10 thing), and I got mine in the second batch (ordered in late October, after all the people who were told Nov 10, so I'm assuming that I got the second batch of phones), so they might have used a different card for the second batch. Try taking the card out, copying all of the data to on it to your computer then formatting it to FAT or FAT32, then trying again.
For the record, I got the md5 sum of the update.zip that I used to update my phone (it's still on the SD card):
nick@nick-desktop:/media/disk$ md5sum update.zip
b1d8201ca431352a68cb15157aed998f update.zip
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