For about a year I stuck to basically the same routine using weight machines. I did 10 reps of 3 sets, for basically the entire upper body, 2-3 days a week. Recently a friend of mine told me that I need to switch up my routine as my body is probably used to this workout and it won't do me any good. So for about the last two months I have been doing free weights. Now I am working out each individual muscle group one time per week. I usually do 3 exercises per group at 8-12 reps, 3 sets. Is this enough? I feel like I have lost some muscle mass over the last few months.

If you feel that machine exercieses work best for you then stick with what works. A lot of people will push you to say that free weights work more synergistically. This is true since you are engaging more muscles for balance, but balance can be developed in other ways. You muscles can't tell the difference between a dumbbell or a machine, it is all resistance and how you stimulate those muscles to that resistance. Make sure you are training with a high level of intensity. If you need better info related to machine versus free weights look up HIT (high intensity training) or Matt Brzycki. Now Matt is a very controversal in the world of strength training and I don't agree with all of his thoughts, but it may be worth a look.

you're muscles might now "know" the difference.. but if the muscles actually had a brain, they would, since they would then see how many more muscles are activated by free weights.
Theres a reason people push folks to do freeweights.

if you have lost muscle mass, its because of you're diet.

Say I stick with free weights, is the frequency that I am currently doing enough?

3 days a week, work you're entire body.
If you want you can post you're program and we can look at it for you.

You need to work your entire body, and every muscle group 2-3 times per week. The most efective routine concentrates on the largest muscles and basic compound exercises like squats, deadlifts, bench press, bent row, pullups, military presses. But remember: nutrition, rest and consistancy are more important than the actual exercise routine.

Freeweights, compound moves, hit each body part 3 times a week. If you're hitting each body part once a week, that's not nearly enough stimulation to promote growth. Do full body workouts, or an upper/lower push/pull split. If you haven't been around long enough to develop a well ballanced plan, then use a premade like New Rules of Lifting, Home Grown Muscle, or Scrawny to Brawny. Or if you'd like, I can help you come up with something.

Free weights are great because you have to use your stabilizer muscles during the exercises as well.

Why are you only working your upper body? That's a horrible idea, you will set yourself up for injury that could very well be permanant.

The advice people have been saying of full body 3x a week is good advice. Your body does adapt to things and you need to switch it up every couple of months.