Can I update my software version from 4.0.1 to 5.0.1?

Dear friends,
I have an iphone, gifted to me, with a software version of 4.0.1.  I have just been using it for more than a year now with itunes and other Apps.  Everytime I connect it to the computer, it is telling that a new version 5.0.1 is available but I am afraid to download it fearing any adverse effect on my existing content and apps. (Especially so because I am not aware of its purchase details and other particulars).  Some of the Apps I have do not get installed in my phone since they all need 4.3.0 or more.  Please advise whether I can go ahead with downloading the latest version or whether any risks are associated.
Thanks for the help in advance!
Nrn

Plug into iTunes, select iPhone under DEVICES and right click and do a backup first before you update to 5.0.1.
It will ask you to restore, so you can choose to restore from backup.

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