Update: On Sunday, Apple fixed the confusing headline in their support article described below. It now correctly says “Update iPhoto '11 to 9.0.1 before upgrading library”. Much better!
Apple has just released an update for iPhoto '11, which they say “in extremely rare cases, could result in data loss when upgrading a library from an earlier version of iPhoto.”
I can't deny that the language really rankles. Frankly, I think they should be worrying more about their customers' photos that were lost and less about how it sounds. There should be a press release that alerts people to the problem and to the solution to make sure that no one else loses this very precious data.
And it doesn't help that they've done it in the most confusing way possible. The headline to the support article says “Upgrade iPhoto library prior to iPhoto '11 Update”:
But that's exactly what you should not do! Indeed, the whole rest of the article is about updating iPhoto '11 before upgrading your iPhoto Library, since upgrading your iPhoto Library with the originally shipped iPhoto '11 is what is erasing people's files.
This is made worse by the fact that they released an update called "9.0.1" for iPhoto "11". It turns out that iPhoto '11 is really version 9.0 (while the last version, iPhoto '09, was really version 8). It's confusing Marketing speak and right now it's pretty annoying. It makes you think that you should go back to iPhoto '09 and update it before installing iPhoto '11. That's not the case. To find out what version you have, choose iPhoto > About iPhoto.
The other problem is the confusion between “updating” the software (iPhoto itself) and “upgrading” your library of photos (the iPhoto Library package, of which there may be more than one, it may have some other name, and is usually found in your Pictures folder).
When you install iPhoto '11, it doesn't automatically or immediately touch your library. So, it's safe to install iPhoto '11 from the disks, then update it with Software Update or by manually downloading and installing the update. Your library will not yet be affected. You should definitely do this first, regardless of the headline of Apple's support article.
Once you open iPhoto '11, it will ask you if you want to upgrade your iPhoto Library. Here's where a lot of people (oh yeah, I forgot, extremely rare cases) had trouble. Make sure you have at least one and preferably two or more full backups of your library or libraries before proceeding. And make sure you've installed the update.
Apple says that updating your iPhoto Library can take “up to an hour or more” and that even if the program looks like it's hung, you should not force quit. Be patient. And contact AppleCare if you get stuck.