If you are afraid to upgrade your iPhone to iOS 5 or do not know what to do, follow these steps.

Plug the iPhone into iTunes, in the Devices section on the left, right-click and select Backup. Then right-click again and select Transfer Purchases to finish.
Photos: My Computer sees the iPhone as a camera. Right-click and Import Pictures. Or open it and back up the DCIM folder directly.
Back up any other files or documents you have.
Upgrade iTunes to 10.5, otherwise iOS 5 cannot be installed.
Then click Restore – it will start downloading iOS 5 (~800 MB).
After download it will extract and start installation. You may see error 3200 due to high load on Apple servers. Try again.
If your device is jailbroken it may crash on first install. Put it in DFU mode and press Restore again. If you do not remember DFU, search Google for instructions.
After installation completes, you can use the device without a computer.
Configure Wi-Fi, time/date, language, etc.
In iTunes you can restore from backup, restore from iCloud, or set up as a new user.
Restoring from your latest backup restores everything but jailbroken apps will not be installed; you may also bring back unnecessary files – be careful.
We recommend setting up as a new user. You can install your apps cleanly afterwards.
As a new user only your SMS messages (and possibly notes) will be lost. For notes you can sync with Outlook beforehand.

(Thanks to Kayhan Belek for his help with this article.)

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