You can't do an incremental upgrade between Windows XP and Windows 7. Although you can buy an upgrade version of 7, when you perform the upgrade the previous installation (and any previously installed data and applications) are removed.
If you bought the machine with Windows XP, you should run the Microsoft Windows 7 compatibility check (downloadable from the Microsoft website) to check that your machine and peripherals will actually run Windows 7.
So, to safely perform the upgrade you must back up all your data (you do that anyway, right?) and make sure you have the original installation disks and registration keys for your applications. Some applications, such as Adobe Photoshop, are "registered" with Adobe upon installation - they should be de-registered so that you can install them safely on the new Windows 7.
When you install Windows 7, you can choose to install the 64 bit version instead of the 32 bit version. The 64 bit version is considered the "future" of Windows - the majority of Windows 7 installations are 64 bit - but some caution may be required; older 16 bit applications (which include many games) can't be installed on the 64 bit version of Windows 7. If you have older applications which need to run on Windows 7, it would be wise to check that they work with 7 or, at least, aren't 16 bit applications (ie designed for Windows 98) before installing the 64 bit version.
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