iPhone Software 2.1 Update includes:
• 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

For details on the security fixes/improvements in v2.1, see the Apple doc About the security content of iPhone v2.1.
I decided to go ahead and jump on this around 10AM this morning. The update went fine on this 1st gen iPhone. Not seen any problems so far and I have noticed backups are much faster. (Maybe it's doing 'smart' backups now?) A reader with 3G iPhone sent his first impressions:

"Install from download to activation took 55 minutes this also included the backup prior to download. Looks good to me so far. 3G holds tight now. When switching from 3G, 2G or Edge it is quicker.
(I asked if he'd checked Backup speed)
Backup is a LOT faster! Battery is Much better too. Been on 3G all day and the battery life would usually be pretty low by now but its not... I am happy with this update so far.
I did a hard reset as the iPhone seemed a little sketchy after the update, it helped a lot.
-William R."

I have an old habit of always shutting down/restarting the iPhone after any update (or app install). In fact I did a shutdown/restart before connecting to the mac to update to 2.1 also. There's some web stories today noting generally positive initial responses from users of v2.1, although as with any update some will have problems.

• iPod Touch (2nd Gen. 16GB) review (cnet)
• Apple's iPhone (2.1) software update going well so far (LAtimes)
• Apple patches iPhone bugs, early response positive (AP)
• Apple stomps bugs with iPhone 2.1 software release (cnet)
• iTunes update for Windows Vista addresses BSOD (ref: apple support doc iTunes 8: If Windows Vista displays a blue screen error message when connecting iPhone or iPod that suggests using the updated iTunes 8 installer.)
• VueScan 8.4.87
• BBEdit 9.0.1
• VirtualBox 2.0.2
• Stone Design ships Twittelator Pro V 1.3 for iPhone/Touch
• OS X Leopard On Asus Eee PC (Mini notebook)
• Apple's Genius music recommendations offer mixed results (LAtimes)
• Noise Ninja Video tutorials for Aperture users
• Genius makes iTunes 8 a worthy upgrade (cnet)
• Zune's Recommendations Make Genius Look Average (wired)
• Yahoo tackles Google with iPhone apps, cross-platform mobile tools
• Get Leopard and Windows to Play Nice (pcworld)
• Yes, Zune does support iTunes libraries (cnet)
• iPhone Takes Screenshots (for cache) of Everything You Do (wired)
• Firefox 3.1 To Offer Privacy Mode As Well
• Apple boring? Get over it (CNN/Fortune)
• MediaCentral 2.8.2
• StarCraft: Brood War 1.15.3 (notes fix for 256 color mode issues)
• StarCraft 1.15.3 (notes fix for 256 color mode issues)
• MemoryMiner 1.86 (photo annotation and storytelling tool)
• FxFactory 2.0.5 (visual effects for Final Cut Pro, Express, and Motion)
• Autodesk FBX SDK 2009.1
• Panasonic Launches First 'Micro Four Thirds' Camera
• At eBay, Is Skype There to Stay?
• Seinfeld-Gates TV AD No. 2: 3 times longer, 3 times funnier?
• Made (again) in America (Fortune)
• Mini Cooper Goes Crossover