Updating projects is possible. There is a command 'grails upgrade'. However, the command is not 'magic' and upgraded projects more often than not do need you to manually fix things before they will actually work.
If the project is known to be a 1.3.7 project I think you should start by importing it as such. When you are confident is working as a 1.3.7 project, you can try upgrading to 2.0.4 after that. Trying to do too many things at once, it is much harder to tell what is causing your problems. Is it some problem importing, is it the wrong grails version, a problem with project, a problem in incorrect migration to 2.0.4?
How can we tell?
Take it one step at a time.
Kris De Volder -- SpringSource