I'm having some issues with my iPod Touch.

I have a 3rd generation 32 gig iPod Touch. I have not synced it too often. I'm still using the 4.1.1 OS. I synced it last June then a couple of weeks ago, I had it in my pocket for a few hours and when I tried to use it, about half my apps were missing and the rest were scrambled all over about 4 pages of apps. When I synced it to recover my apps, I lost all of my notes that I had written and saved since last June. I also lost any contacts that I added since the June sync. I thought the point of syncing was to back up the iPod? Does anyone have any ideas on what is going on with this thing?

I need to update the OS but I don't know what the latest version is that will work on this model.