I think the Update button is to "refresh" your files. Like if you copy and paste an icon file into your game's folder, it won't show on the DM until you either reload it, or hit that button.

The .rsc file is locking up because you already have an instance of the game running in DreamSeeker or DreamDaemon. To update the game, you either need to reboot the already running game after a compilation, or take the game down, recompile, and rehost it.