As far as I know, you keep your current progress - it only updates the game data. If you go from 1.0 to legendary, you'll still have everything you had before, as well as the new content. I have the PS3 (not sure how it works on 360) and there's an option in the console menu to delete *game data* (patches, updates, etc.). This allows you to take advantage of bug exploits, but you'll lose all the new content from the legendary save file, which you'd have to reinstall and do all over again, but all the original content should always be just fine.
But again, going from original to legendary only *adds* content, so your current progress will be unaffected.
Hope this helps.