Follow along with the video below to see how to install our site as a web app on your home screen.
Note: This feature may not be available in some browsers.
Should be, but don't take chances. Make a folder on the desktop of your PC labeled "Phone Backup" or whatever. Drag everything from the SD card to that folder.
Make sure everything is completely transfered to the folder and then delete/reformat the SD card. Now I just realized you said OTA. Still, do the previous step for good housekeeping on the phone.
Yes, your apps will be gone and your contacts will be too. If the contacts have been saved as Google contacts (go to GMail, click on contacts, can you see your phone contacts too?) they will automatically sync when you log in on the phone again with your GMail account. If they are not Google contacts (they don't show up in GMail) find an app to back them up (PM me, I'll give you some names).
Download an app (free) called AppBrain. Make an account with them and sync your apps with them.
When you install 2.1 and have logged in with your GMail account, your contacts will sync.
Go to the Market and download AppBrain again. Sign in to your account there and all your apps should be there waiting for redownload again.
You should be back to (roughly) where you were on 1.5.
There should be another OTA after the 2.1 update, and that shouldn't wipe your phone. If it does, just repeat the steps from above.