Downcycling is the recycling of a material into a material of lesser quality. A clear example is plastic recycling, which turns the material into lower grade plastics. This is the most common way of recycling and includes the way most of your convienence center drop offs and curbside services operate.
Upcycling is a component of sustainability in which waste materials are used to provide new products. It is generally a reinvestment in the environment. "Upcycling is the practice of taking something that is disposable and transforming it into something of greater use and value. This process allows for the reduction of waste and virgin material use. Several examples can be found at http://sustainablog.org/2008/09/09/six-creative-upcycling-projects/ many others can be found throughout the web by simply searching the phrase upcycle or upcycling.
Both forms of recycling are extremely better than simply sending your waste to the landfills, so don't think that if you can't upcycle it it's no use because it definately is.

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I like the upcycle concept and that is what I am doing with some things at Area 61. I get material that would otherwise go to the landfill and make home decor items and furniture. This is all good, new material not old scrap. Another aspect that we all at Area 61 do is salvage lumber. This is tremendous stuff!! The lumber is beautiful beyond words and in some cases not available new or not in this form (old growth).
There are so many cool products out there now that are made from "upcycled" materials. Terracycle makes some pretty slick bags from old juice containers. I bought a cool duffel bag that was made from an old sail! Popularity for these kinds of items is growing, so hopefully we will see consumers get over the general stigma that these materials are somehow inferior.

Philip Timm said:
I like the upcycle concept and that is what I am doing with some things at Area 61. I get material that would otherwise go to the landfill and make home decor items and furniture. This is all good, new material not old scrap. Another aspect that we all at Area 61 do is salvage lumber. This is tremendous stuff!! The lumber is beautiful beyond words and in some cases not available new or not in this form (old growth).

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