The iPhone 2.0 software allows existing iPhone and iPod Touch owners to have access to the software features that will be available on the new iPhone 3G that hits stores Friday morning
Here is what Apple writes about updating to 2.0 firmware:
“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.”
To update or restore iPhone or iPod touch first make sure you have an Internet connection and have installed the latest version of iTunes; 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or iPod touch in the Source pane and click the Summary tab, click "Check for Update"; iTunes will tell you if there's a newer version of the iPhone or iPod touch software available; click Update to install the latest version of the software, or click Restore to restore iPhone or iPod touch to its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. At last follow the onscreen instructions to complete the restore process.
The download is free for iPhone users, but for iPod Touch users it costs $9.95.