not just update, flash it and install custom rom right out of the box. no jk

 

at the very least de-brand it

 

i cant provide you with a list of what you cant do on 1.6 that you can on 2.1+ but there are many things that only work on 2.1+
ideally 2.2 allows you to have some apps that do not work on any earlier versions.
the difference between the software is huge, if you even update to SE 2.1 you will be a lot happier with your phone.

one thing that springs to mind is flash is available on 2.2+
the latest SE 2.1 also has things like dual-touch which allows pinch zoom etc

and yes, you have to do this kind of upgrade plugged in as you are flashing new firmware which is something that is simply impossible over the air.

 

[FLASHTOOL GUIDE] HOW TO for n00bies - Android Forums

De or Rebrand Your X10i/a - Android Forums

 

And as someone pointed out you should at least debrand, as AT&T locked all the interesting features (like installing an app outside of the Market)

 

This person answered that one for you.

 

at least get the generic 2.1, I did it the first week and it was definitely worth it. a lot of small improvements

 

Biggest improvement I find is that there are few apps that just work with 1.6. Most work with 2.1 or higher.

Hopefully we get a solid 2.3 on the x10 soon, then we should be able to download all the apps in the app store.