You can update from any version except version 1.00 to any of the newer versions directly. Version 1.00 has to go back to Lionel to be initially upgraded the first time. Anything from 1.30 to current also has the ability to write black modules so you can upgrade if you just have a serial data link to the command base. Version 1.20 can be updated directly to the latest version, but it doesn't have to code to write black modules, so you have to obtain a written module externally.
You can also create writable modules from old blue modules if you're at all handy.