I would recommend removing the sd card and sim card.
It is best to wipe cache/data then do factory reset (I think done together they are referred to as a 'hard rest', which you can also do from the keypad by entering the appropriate special code).
For further info see the sticky on upgrading from 2.1 to 2.2.
Whenever I am flashing a new 2.2 custom ROM or custom Kernel I always remove the sd card and SIM card and do a 'hard reset' at the beginning, and afterwards before re-inserting the sd card and sim card. I find I don't have any issues if I stick to this procedure.
bjlabuk