"You have made changes to your photo library using a newer version of iPhoto. Please quit and use the latest version of iPhoto".
Move your iPhoto Library out of your Pictures folder to a regular external drive and delete the origianl.
Start iPhoto and it will create a new iPhoto Library in Pictures.
Upgrade iPhoto and quit, replace the empty iPhoto Library with the one from the external drive.
If you have issues, you can hold option key down while starting iPhoto to select other iPhoto Libraries, also you can right click on the iPhoto Library and "show package contents" inside is a folder called originals or masters with your original files you can copy out and reimport into the new iPhoto Library.
How do I go about upgrading iPhoto though?
You didn't purchase iLife from the AppStore so it won't appear there in your purchases, but obviously it was upgraded as your iPhoto Library has changed.
Again, you also can simply right click on the iPhoto Library and "Show Package Contents" and in a folder called Originals or Master is your original pictures, copy them out and reimport into the older iPhoto which will place them into the older iPhoto Library format.
When you Software Update, all will be upgraded again. But with this method you lose any other changes obviously.