Upgrading a Windows Phone 7 to WP 7.1 is as simple as in other .NET apps.  In Solution Explorer, right-click on the project and select Properties.  On the Application tab, find the "Target Windows Phone Version:" dropdown list, and select Windows Phone 7.1.

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Heed this warning!  There is no going back.  Make sure you have everything checked into your version control system and tagged as being WP 7.0, or bare minimum make a copy of the project folders.  Remember, these tools are still beta at this time!

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Once the upgrade is done, it's time for acceptance testing.  Hopefully, not too many breaking changes.  Make sure you have your Warnings visible in the Error List, since you'll be notified of deprecated methods and properties there.