It’s odd, but I’m wondering if having both systems ‘present’ at the same time is confusing the setup process. 

Try unplugging all of your S1 intended devices from power, leaving just your devices intended to move to S2 powered on. Try the upgrade, and see if you can complete the process, ending with an S2 system. 

Once that’s done, go ahead and plug back in your S1 devices, and run the S1 controller to make sure they can be ‘seen’ and operated. 

I think this should leave you with the two separate systems, and both should be operating normally.

thanks Bruce, that is what I was hoping would happen too. But alas, it doesn’t work. I have tried several variations of unplugging devices… including just the S1 intended devices…. unplugging all devices… unplugging all but one device, but each attempt to upgrade produces the same error 1101. 
I was wondering whether ‘forgetting the system’ would work, or ultimately factory resetting devices would be worth trying (I am beyond caring about custom settings like device names or EQ tuning)… but heed the advice warning against this unless specifically advised by Sonos.

Any further thoughts on this? Thanks again.

1101 , if memory serves, means that the speakers can’t reach, or are timing out when reaching the Sonos update servers. Which implies one or more of several issues, from some sort of VPN/Virus Protection/Port Blocking (most recently MS Defender’s definitions as one example) to simple wifi interference . Hard to tell anecdotally. 

I would recommend that you submit a system diagnostic within 10 minutes of recreating this error, and call Sonos Support to discuss it.

There may be information included in the diagnostic that will help Sonos pinpoint the issue and help you find a solution.

When you speak directly to the phone folks, they have tools at their disposal that will allow them to give you advice specific to your Sonos system and network.

Sometimes the controllers get their knickers tied in a knot. I recommend uninstalling the controllers. Nothing critical is stored in the controllers. Power down all of the the units, power up the S1 units that you intend to transfer to S2 and install the S1 controller. As the S1 controller installs be sure to join an existing system, don’t install a new system. I expect that the S1 controller will offer to upgrade the System to S2. If so, upgrade. Now, you can power up the new S2 units and add them to the S2 system.

Now, uninstall the S1 controller of it is still present. Power down the S2 units, close the S2 controller, and install the S1 controller. When the S1 controller comes up you may need to allow it to discover your system. In any case, don’t start a new system.

At this point you should have both S1 and S2 systems. This was messy, but this procedure will give you the best chance of retaining your music service registrations and SONOS Playlists. S1 and S2 will coexist nicely. Occasionally, S1 will chide you for not upgrading your components.

Or, you can Factory Reset everything an uninstall the controllers. Both schemes are a lot of trouble. As you install S1 make sure that the S2 units are powered down. Likewise, as you install S2 make sure the S1 controller is closed and the S1 units are powered down.