The upgrade feature changes the model a unit uses as well as provding a hardcoded stat increase to attack (+7 i think) or armour (+2.5).
Because the model is changed so is the skin used, the skeleton and the animations.

Apart from the already mentioned attack and armour vaules, the blacksmith upgrade doesn't change anything else in the EDU. So morale, upkeep, unit attributes etc are kept the same, this is why the from of unit upgrading mentioned earlier wouldn't work, aside from the historical and realism problems.