If after updating your Windows Phone 7 operating system to the latest version, you wish to do a ‘system restore’ of your Windows Phone, this is the way you can do it.
Open your Zune software and connect your Windows Phone to your computer by using the USB cable that was included with the phone.
Click Settings > Phone > Update.
Click Restore and follow the on-screen directions.
Do note that when you restore an earlier version, you’ll lose all changes that you made since the restore point, including apps you’ve installed, music you’ve downloaded, and settings you’ve changed.
If you’ve changed the PIN since then, you will have to enter your previous PIN to unlock your phone after restoration.
So, make sure that you copy to your computer anything that you want to save before you restore your phone.