I thought the HowTo said to just upgrade the kernel modules?
If you attempt to perform an upgrade of the entire image you'll almost certainly run out of space on the collie. I imagine this is what has happened to you (what does 'mount' or 'df' show?).
There are a couple of threads about how to recover from this - basically you need to remove some stuff by hand so that ipkg has enough space to run, then use ipkg to remove/upgrade individual packages.
Si