I understand that it is not necessarily recommended to download a brand new OS version as soon as it comes out, due to bugs.

Technically speaking, what is the difference between my fully updated Fedora 6, and a new Fedora 7 install? I'm not really asking about the Fedora 6/7 example specifically. Rather, I am asking for a wholistic perspective.

Well, I can only speak in Debian terms. In Debian, the stable branch receives updates that are just security updates. No newer version of a package is added to your system. An upgrade, however, would change all the packages to the newest packages in the repository.

For example, Sarge (oldstable) had a 2.6.8 kernel. A kernel update was from 2.6.8-2 to 2.6.8-3 (just security updates). But an upgrade is from Sarge to Etch (current stable) changes the kernel from 2.6.8-3 to 2.6.18-4. Similarly, all your packages will go to the newest version your distro has.

Does that answer the question (or did I answer the wrong question)?

Yes, it does, at least from your standpoint. Is that standard practice on most well-known distros; updating only bugfixes and security patches within a single distro release?

I would assume so. A lot of times when a new version of a program comes out, it is probably written against the newest libraries available. So I would say that any programs that would require upgrading libraries are not upgraded. Some distros probably release newer versions of programs that can still be compiled against current libraries.

For example, Debian won't release k3b 1.0 on Etch (stable) just security updates to 0.13 (I think). But if possible, another distro, like openSuse, may compile k3b 1.0 against current libraries and then release that package. But I'm speculating...

Gentoo does not use the concept of versions, as the entire system can be upgraded to the latest package releases ... including the kernel.

A Gentoo system that was installed 4 years ago can be simply upgraded to the most current system by a simple command:

New Debian (Lenny) is actually the same as a perfectly up-to-date Etch - I have them side by side and I can't find any obvious differences (even the kernel is identical). The main, difference, of course is that Lenny will keep evolving whereas Etch has reached its final form.

Debian, too, by the way can be upgraded by using a simple command:
apt-get update && apt-get dist-upgrade

As for Fedora 7 at this time, the differences with Fedora Core 6 are minimal. It uses a 2.6.21 kernel (which FC6 may get as well before long); but most importantly it has merged the core and extras repos (which is why the "Core" part was dropped from its title).

The release notes for Fedora 7 should highlight the significant differences between FC6 and Fedora 7