How can I update a system application without re-installing the OS? I have create an application and installed it to a device in the Android system image.  

Now I have added some new features to my app and I want to update my current install app with that new feature.  

One way I could do this is by re-installing the android OS with the new version of the app.

Is there another way that I can do this so that I can update the app without having to update my whole Android operating system?
As long as you have the release key (or whatever key you use) used sign the app in the /system you could just quickly side-load your application:

adb install -r bin/my-signed-app.apk


Note the '-r' option.

This will update the application, but not remove/update the apk file in /system or clear the user's data. 

You might have to clear the data first due to database schema changes:

adb shell pm clear my.app.package


You could then go and manually remove this 'update' via the app settings Activity.