From Dictionary.com
Update:
2. Computers. to incorporate new or more accurate information in (a database, program, procedure, etc.).
Upgrade:
a new version, improved model, etc.: The company is offering an upgrade of its sports sedan.
From Financial Soft:
Question: What Is the Difference Between a Software Upgrade and a Software Update?
Update, upgrade, which do you choose? What is the difference between a software update and a software upgrade anyway?
Answer: The difference between a software upgrade and a software update can be confusing.
A software update provides bug fixes and minor software enhancements and is made available by free download. Software updates sometimes include new drivers to support the latest hardware such as printers, CD drives and DVD drives. A software update is sometimes called a software patch because it is applied over software that you already have installed. A software update does not provide a full software package installation.
A software upgrade is a purchase of a newer version of software you currently use. For example, if you currently use Quicken 2005 and you buy and install Quicken 2008, you have just upgraded your Quicken software. There is usually a cost for a software upgrade.
And, to paraphrase some great thinker somewhere:
If it looks like an upgrade, and smells like an upgrade, and tastes like an upgrade, and acts like an upgrade, then it is an upgrade.
BTW, "Upgrade, Upgrade, wherefore art thou upgrade" is not a question about location, as most people might think.