This may be old news, but we just hit this issue the other day. If you try to upgrade an instance of SharePoint Portal Server 2003 or WSS 2.0 that is running on a named instance of SQL Server called "SharePoint", the gradual upgrade option is greyed out. It turns out that this is because the installer
thinks that you are trying to upgrade an instance of MSDE. Changing the instance name to something other than "SharePoint" does the trick. Talk about hardcoding something...