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Doing a radio update is like basically updating the firmware for the radio(3G, WiFi etc.) Think of it like updating the OS for the radio with bug fixes and improvements. These updates can potentially increase signal strength or increase battery life. These radio's are pushed to your phone with OTA carrier updates such as when you receive an update from Froyo to Gingerbread, this radio would be included in the update from your carrier. This does not get updated when you dial *228(if your on Verizon).

Make sure you select the correct radio and you do compare the md5 hashes because most times that a phone gets bricked it is while doing a radio update
Hope that helps you out.

BTW. This is also referred to sometimes as baseband updates
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