freebsd-update will upgrade the kernel and the world in one go. If it completed successfully, and you have rebooted, then you are running FreeBSD 7.0. You have successfully upgraded the OS.
The second part is recompiling/reinstalling all your ports. If you have a lot of ports installed, and don't want to spend too long getting everything working again, you can install the compat6x port. This will allow you to run FreeBSD 6.x applications on FreeBSD 7.x.
However, you *will* have to reinstall *all* your ports. How you do that (manually, portmaster, portupgrade, portmanager, etc, is up to you. But you have to do it.
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