Yes, immediately update your firmware. Not only does it improve the touch screen dramatically it also improves video codec support and adds apps ability(see the Development subforum).
Now for syncing music I personally use Creative Central. It works fine and I don't have issues with it but I'm sure WMP11+ works just fine too. For videos however I use Super(http://www.erightsoft.com/SUPER.html
) video converter(avi container, xvid codec) to create spectacular quality videos even for up-scaled TV-Out.