I've never had a problem with a Debian in-place upgrade; I've got servers that have been upgraded from woody through to squeeze without a hitch. Where I've had problems with Ubuntu, it's been around the desktop, and udev/hotplug integration.

That being said, I've not given it a fair try for a few releases, so it's possible that in-place upgrades are better tested now, but I don't see the point of taking the risk. If it goes wrong, I'll end up reimaging anyway, so why waste the time?

In the past I've found that if I installed packages that weren't in the main release I would sometimes run into gigantic dependency issues that I couldn't resolve without a clean reinstall.

I'm not the OP, but on my in-place upgrade to Natty today I had the nspluginwrapper installer die with a segfault. As a result, the update "failed" (only nspluginwrapper failed, really). I had to remove google-talkplugin to fix it (so really, the bug was in Google Talk, but apparently nobody at Canonical has Google Talk 64-bit installed to encounter this). So yes, seemingly-inconsequential system changes can interfere with upgrades.