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I don't think it screws up your settings. Instead of 3.1.2, I suggest you go to 3.1.3 and install the PDF patch.
 
iTunes does not need to erase & restore for what are considered delta or dot updates so you have nothing to be concerned about. That said, you should always make a backup of the iPhone just the same as you would/should make a backup of your computer before installing a newer OS.
 
That's why you do a backup then restore from backup when doing a firmware upgrade. You end up losing nothing.
 
You're right. I hit the shift+click Restore to "update". How do you just update without wiping the data. I already did it and the phone is now wiped but I'd like to know anyway for future reference.
 
You're right. I hit the shift+click Restore to "update". How do you just update without wiping the data. I already did it and the phone is now wiped but I'd like to know anyway for future reference.

Below the picture of the iPhone in the Summary tab in iTunes, there should be a button that says update. It's hard to miss.
 
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