What it fixes
A page dedicated to the release on Apple's website details a dozen major enhancements including:
Decrease in call set-up failures and dropped calls.
Significantly better battery life for most users.
Dramatically reduced time to backup to iTunes.
Improved email reliability, notably fetching email from POP and Exchange accounts.
Faster installation of 3rd party applications.
Fixed bugs causing hangs and crashes for users with lots of third party applications.
Improved performance in text messaging.
Faster loading and searching of contacts.
Improved accuracy of the 3G signal strength display.
Repeat alert up to two additional times for incoming text messages.
Option to wipe data after ten failed passcode attempts.
Genius playlist creation [Illustrated by one reader] .
How to install
Before installing the update, make sure you are using iTunes 8 [Download Link], then connect your iPhone to your computer.
When iTunes opens, select your iPhone under Devices in the Source List on the left.
In the iPhone Summary pane, click Check for Update.
Click Download and Install. Do not disconnect your iPhone until the update has finished.
iPhone Software 2.1 also patch six security vulnerabilities.
An application may be able to read another application's files.
Multiple vulnerabilities in FreeType v2.3.5.
mDNSResponder is susceptible to DNS cache poisoning and may return forged information.
Predictable TCP initial sequence numbers generation may lead to TCP spoofing or session hijacking.
An unauthorized user may bypass the Passcode Lock and launch iPhone applications.
Visiting a maliciously crafted website may lead to an unexpected application termination or arbitrary code execution.
Some of the other enhancements and observations reported by readers thus far:
No sign of background push notification or turn-by-turn GPS support.
The texting memory leak problem seems to be fixed.
Apps are running a lot faster.
No scrolling lag, faster launching of SMS app.
New "3G" logo in the menu bar sans box.
Updating applications keeps their icons in place on the home screen.
App syncs still sluggish compared to media syncs.
Readers are encouraged to share their own discoveries in the AppleInsider forum thread for this article.