Firefox 1.0.7 is the current version, but version 1.5 RC2 is currently available for download from the Mozilla website. Release Candidates represent a near-finished project that is being tested to see if any minor bugs remain, especially with using third-party extensions and themes. If you want you can download/install it now, or wait for the final release which is expected this month as long as no problems arise.
When upgrading from 1.0.7 to 1.5, you'll have to uninstall the old version before installing the new. (If you want, you can install both of them side-by-side into different folders/directories and use them both, but there's little reason to do such.) Once you have 1.5, you'll no longer have to uninstall and reinstall Firefox for each new version...it will update itself automatically. This includes, to my knowledge, going from 1.5 RC2 to 1.5 (release version).
However, you never (with 1.0.7 or 1.5) have to worry about losing your favorites and settings. Those are stored in a default profile in another directory, which is not deleted upon uninstalling/upgrading Firefox. On the flip side, you will have to reinstall and themes and extensions when going from 1.0.7 to 1.5, but not from then on.
Hope this helps,