Update Package versus Refresh Package

You may have noticed that if you right click on the distribution point node of a Package you will get an option to Update Distribution points. If you open the node and right click on an individual DP you will get an option to refresh the package on that distribution point. There is no option to refresh a package on all DP's and there is no option to Update a package on just one DP. What's going on here? Well, each function is slightly different. When you create a package and assign a source location to it, that package is actually stored on the site server in the SMSPKG folder as a compressed file in the form of PackageID.pck extension. This folder is shared out from the site server as \\server\SMS_CPSx$, where x represents the drive letter it is located on. When choosing the option to Update a package a delta file of the changes is created from the specified source location and the version number is incremented for both the source and client policy. The delta file is what gets sent out to the DP's. Choosing the option to refresh a package will actually repair a package at a DP by recopying the entire compressed package from the local site server to the DP. There is no update of any changes that may have occured at the package source.

More info: http://technet.microsoft.com/en-us/library/bb892806.aspx
and here: http://www.serverwatch.com/tutorials/article.php/1474011