Android’s latest version Froyo is now available for Droid phones. If you’re a Droid phone owner, you’ll be pleased to now that updating your version of Android is pretty darn easy. Here’s step-by-step instructions on how to update your Droid:

Step 1.
Grab the update file here.

Step 2.
Place it on the root of your SD card.

Step 3.
Power down, then restart while holding the X key to get to the bootloader.

Step 4.
When you see the exclamation mark, hold the volume up button and press the camera button.

Step 5.
Choose apply sdcard:update.zip. (Ignore the cache error.)

Step 6.
Reboot!

Source: Android Central Forums