Can/Should I upgrade iPhone software?

My iPhone is 3GS. I have software version 3.1 (don't think I've ever updated it!). I've noticed more and more apps are unavailable as I don't have current enough software but I'm worried if I update to the latest version I'll have problems with the battery etc. We currently have iTunes version 10.0.1.22 - do I need to upgrade iTunes also? I don't have a good track record with updating iTunes as it always seems to mess up the computer - it seems ok if you're starting from fresh with a new computer but updating an existing version of iTunes always seems a nightmare. Should I update the iPhone software or just accept that I'll have less and less access to apps? Thx.

It is ultimately your decision whether to upgrade or not.
That being said, there are a multitude of security enhancements, bug fixes, and performance enhancements that have been incorporated into iOS over the last two years.
Why are you concerned about the battery? Because a handful of users have reported battery issues after upgrading? If you look through the forums, you will see the same issues reported after EVERY iOS upgrade dating back to version 1.0.
Your version of iTunes is current, so there is no need to update that.
Just make sure you have a good backup prior to starting the update, this is the first step in the process, but always better to be safe than sorry.

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