Just FYI, there is No option when upgrading from XP to 7; you MUST do a complete clean install (with either upgrade or full) but the format is optional. If you do not format first then all the XP windows files will be moved to windows.old.
The upgrade version is essentially a discount to repeat buyers. The upgrade version comes with a new license & key but legally it contingent on you also having your old XP license. In other words you can't turn around and sell your XP CD/discs on eBay once you install the XP upgrade version. If your computer came with XP installed then you most likely have a sticker on the unit which is your XP license otherwise there would have been a license on or in the XP packaging. You will not be asked for your XP license key.
Before you upgrade it's a good idea to run the
windows upgrade advisor. It will try to tell you which programs and printers etc will no longer work in W7 and it should tell you if you can run 64 or 32 bit.
When you upgrade you will need to pick 32 or 64 bit. If your motherboard supports it, you have at least 2GB of ram. preferably 3 or more and you don't have a lot of 16-bit programs then I recommend 64-bit. Even if you do have a few 16bit programs consider 64bit and buying the Professional version so you can run XP in a Virtual window.
I touched on Professional but you will need to decide which flavor you need; Windows 7 starter, home premium, professional, ultimate, (or enterprise). Starter is very limited so unless you buy a netbook you probably won't consider starting there. Home Premium is designed for your normal user. But if you need
Virtual PC - XP mode that I touched on above, then you need Professional or higher. Ultimate is for users that need bit locker data encryption or wish to be able to change the language windows uses in message displays (up to 26 languages are available but it causes overhead so you would only load the languages you need). Enterprise is for corporations.
I personally use Professional because I have a few very old programs (including my much loved mshearts which is not supported in W7) that will only run on XP so I use the Virtual PC - XP mode for those.
Also if you wish to carry over all your logon ids and settings you will want to get
W7 Easy Transfer.