You can use iTunes to update or restore iPhone or iPod touch software. Apple recommends updating iPhone or iPod touch to use the latest software. You can also restore the software, which puts iPhone or iPod touch back to its factory condition.

Normally if you choose to update, the iPhone or iPod touch software is updated but your settings and media are not affected. If your device currently has a software version prior to 2.0 (1.x) and you are updating to software version 2.0 or later, all data on your device will be erased in order to perform install the new software. In this case, iTunes will offer to create a one-time media backup of your device depending on what content is on your device and what content is stored in the iTunes Library you are connected to. You should ensure that you have enough free space on your Mac or PC to accommodate a backup that matches the capacity of your iPhone or iPod touch (4 GB, 8 GB, 16 GB, or 32 GB) if you proceed with the this backup.

If you choose to restore, all data is erased from iPhone or iPod touch, including songs, videos, contacts, photos, calendar information, and any other data. All iPhone or iPod touch settings are restored to their factory condition. Whenever you update or restore your iPhone or iPod touch software, Apple highly recommends that you perform a sync prior to the update in order to back up any changes since your last sync.

To update or restore iPhone or iPod touch
Make sure you have an Internet connection and have installed the latest version of iTunes from www.apple.com/itunes/download.
Connect iPhone or iPod touch to your computer.
In iTunes, select iPhone or iPod touch in the Source pane and click the Summary tab.
Click "Check for Update." iTunes will tell you if there's a newer version of the iPhone or iPod touch software available.
Click Update to install the latest version of the software. Or click Restore to restore iPhone or iPod touch to its original settings. Follow the onscreen instructions to complete the restore process.

For more info see Apple's Updating and restoring iPhone and iPod touch software article.

New in this version:
Bug Fixes

Requirements:
OS X 10.4 or later
iTunes 7.4 or later