I was a bit curious to know what a distribution (i.e. 10.04 to 10.10) upgrade really means. Correct me if I'm wrong, but it seems the update manager is constantly upgrading every piece of software on my computer and as I understand it, Ubuntu is a "collection" of open source software. With that in mind, I would be curious to know what really goes into a distribution upgrade in practice.
Unless you've added extra repositories, Update Manager will only offer to install stable release updates, which are updates that fix either high-impact bugs, or security vulnerabilities. Some rare exceptions notwithstanding, they don't provide new upstream versions of software that constitutes Ubuntu.
A distribution upgrade, on the other hand, does: it takes you from one Ubuntu stable release to the next, thus most packages you have installed will typically be updated to new upstream versions.
Everyday update -> security fixes, minor improvements - (all software you use stays at the same version, which is a bit older than current, but much more stable)
Distribution upgrade -> new features, new pieces of software, major changes - (every part of your ubuntu gets upgraded to new version, that was developed since last ubuntu release)
Ubuntu upgrades an installed software which getting to the Official repository (only). Mostly they're security updates. IMHO, if Ubuntu will become a rolling release, we would have more updates of all installed software (I hope without need of additional PPAs), and possibly a 'distribution update/upgrade' will become an insignificant action :)
Best wishes, Vincenzo