Q: How do i install this update because it says that my software is up to date (and obviously it isn't)

With a few exceptions, Software Update usually does the right thing here.

Please confirm which patch you are looking at; is it the one referenced by HT5784?  (The titles around here sometimes change, and references to various updates do get added to posts.  That HT5784 is for 10.8.4, though your footer indicates a 10.7.5 version, too.)  I think the phrasing of that article is a little confusing; if I read that correctly, 10.8.4 includes the cited security update.   That security update was available separately for previous OS X versions.

Here's the download link for the Mountain Lion Security Update 2013-003, which looks to be the latest available update.  Software Update should have already offered that installation.

For other patches and other versions (and again, I'd expect Software Update to do the right thing here, for most cases), here are the downloads for OS X and here is a write-up on the various security updates (HT1222).