I dist-upgraded from Sarge to Etch, and faced a *lot* of problems.
For one thing, the kernel is not upgraded during a dist-upgrade. Many, many problems, including a non-fucntional X-server originate from this.
After the dist-upgrade, I also upgraded the kernel to 2.6.17-2-K7. Strangely enough, although I had GRUB installed, apt installed LILO again.
After this install my mouse driver was loaded again, but my NVIDIA MX400 driver was not compatible anymore.
I installed the kernel source, make oldconfig the config of my old kernel, compiled the kernel and installed it. (If you do that as well, do not forget to update LILO!)
I downloaded and ran the NVIDIA driver (www.nvidia.com)
. This driver needs to be compiled with the same version of gcc as the kernel was compiled with. Therefore I had recompiled my kernel. The driver installed flawlessly. Maybe you can get away without recompiling the kernel or even installing the source tree. I Dunno.
Even OpenOffice showed decent fonts in the user interface, while previously they had been twice too large.
This dist-upgrade installed KDE 3.5 from KDE 3.3. Almost all KDE applications puke when an old config file is used. Quanta, Konqueror, KDesktop, KControl, KMail, all show odd behaviour. It is not *obvious* that the behaviour comes from an incompatible config file. OK, I swallowed and deleted all KDE settings I had, after that I have not seen any problems with KDE apps yet.
I know this is not a full-fledged how-to for doing a dist-upgrade, but these are at least some tips.