Updating my IPOD Touch to OS 4.1

when trying to update to OS a message appears "An error occurred while backing up this ipod (-120) Would you like to continue to update this ipod without back up?
Continuing without backup will result in the loss of all contents on this ipod"
Is it OK to continue or is ther a simple solution that I can't think of?

That's not true, only the ipod will be reset. iTunes will stay like it was.
That same thing happened to me when I tried to update once (don't remember the version). I just gave up and let it wipe my iPod - all my saves and stuff were lost (it was like it was brand new), but I could transfer everything from iTunes back to the iPod. I never got my records, game saves etc. back, but otherwise it wasn't too bad.

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