You may want to try to upgrade through the cradle, even if it's not working correctly before.
I was never able to reliably use the cradle for syncing before the update (I always had to sync via IR), but I just figured I'd try it anyway -- if your computer doesn't see the axim it won't be able to do the update anyway, so no harm done.
For me, even though I couldn't sync before the update, the update still went through fine. Even better, my device is much more reliable now, and the cradle syncing works much better now (still occassionally having problems, but nothing as bad as before).
As I said, try updating in the cradle...if it doesn't connect, it won't hurt anything (at least I don't see how it could...