Turn off your phone and then turn it back on, but hold down the volume down button when you hit the power button. This will take you to a screen with a simple menu and three Android mascot characters on skateboards. Use the volume buttons to navigate to the "RECOVERY" item on the menu, and then hit the power button. The phone will start to reboot again, but it will display a screen with an exclamation point icon instead of booting all the way.

When you see the exclamation point, press and hold the volume up button and the power button at the same time. This will cause the phone to display the system recovery interface. It might get stuck at the exclamation point screen, in which case you just need to reset and try again. It sometimes takes two or three attempts. At the recovery menu, use the volume buttons to navigate to the "apply sdcard:update.zip" item. Hit the Nexus One scrollball to select the menu item and start the update.

When you start the update, you will see a progress bar as the update package is decompressed and analyzed. If you are not running a compatible build, you will see an "assert failed" error, and the update will abort. When it finishes, you can select the "reboot" option from the menu to start the phone up normally. If the update was successful, you will have Gingerbread on your Nexus One.