Microsoft has released official advice for those running into the 800705B4 time out error when updating their Windows Phone 7 handset.
The error users run into reads as follows:
There was an error while trying to update your device with the latest software.
Please try again.
The timer ran out on what we were trying to do.
To see if there’s more information about this error, click Web Help.
The advice is to first try removing all media, of course after synching it to your computer first, by connecting your phone to the Zune desktop software and clicking click Settings, click Phone, click Sync Options, and then click Erase All Content.
The update can then be tried again.
If this fails users can then try uninstalling apps and games from your phone. Note that this may lose your settings for the apps.
One the update is successfully applied, users can of course sync back their media. Apps can be installed again, and a list of those apps can be find in your purchase history at Settings, then Account, then Purchase History, and select Apps.
See the work around here.