Upgrading dotnetnuke happens as follows:
1. IMPORTANT: backup your site. Make a full backup of all files and of the database. Store them somewhere safe - you never know you might need them. If needed, change or add some portal aliases (if you move the site to another domain such as localhost or a test domain).
2. best practice is then to restore the site locally or in your test environment (restore database backup & place all files in the website directory) If you forgot to put in the required portal aliases, put them into the SQL database (table PortalAliases if I remember correctly). Don't forget to put the right connection in the web.config (to your test database) otherwise a production database connection might get established.
3. Download and unzip the "upgrade" package. Simply copy the files over the existing files. On the production environment, I also copy in "app_offline.htm" to aknowledge any visitors that the site has been taken offline.
4. If web.config settings are autoupgrade = true, just surf to the site (after removing app_offline.htm of course). On production environment I put this to "off" - then you'll need to instantiate the upgrade yourself by surfing to http://yourdomain/install/install.aspx?mode=upgrade.
5. Upgrade starts, you'll be able to follow the proceedings on your screen.
6. If successful, do the same on your production environment
More detailed explanations are given in several blogs (just google your way through them). But I though you'd appreciate some outlines. ;) It's easy if you've done it once. It used to be quite a lot harder in the past.