A good exp on what can be upgradedhttp://arstechnica.com/microsoft/new...than-vista.ars
Quoting from article
"Upgrading from XP or Vista with a retail copy
While these price changes are positive for consumers (none of the products has increased in price), they are rather disappointing for those hoping for much more aggressive price slashes given the current economic climate. Thankfully, retail pricing is typically used as a starting point; most users will not be buying retail versions anyway. Retail sales account for less than 5 percent of Windows sales, the rest of sales are via OEM. Some consumers will either grab an OEM copy via an online or in-store purchase, but most will be getting a copy of Windows 7 with the next purchase of their PC.
Windows XP users need to know that regardless of which edition they currently have installed (Windows XP Home, Windows XP Professional, or Windows XP Media Center Edition) and regardless of which edition of Windows 7 they are moving to (Home Premium, Professional , or Ultimate), they will need to perform a clean install, whether they buy the upgrade or full version. The hassle of backing up applications and user data will fall on the user; a clean install will not back up anything. Using Windows Easy Transfer, users can copy their important files and settings to an external USB stick, external hard drive, or DVD, and then move the data back after the installation.
The installer will verify that XP is genuine and Windows 7 will have to be installed on the same partition as the XP installation. The good news is that Microsoft is allowing XP users to buy the cheaper upgrade version if they want to (Microsoft typically lets owners of the two previous releases of Windows to do this, in this case XP and Vista).
Windows Vista users can follow multiple upgrade paths to Windows 7. As was the case when upgrading from XP to Vista, you will only need to perform a clean install if you are going to a version that is lower on the food chain. For example, if you are going from Windows Vista Ultimate to Windows 7 Home Premium, you would do a clean install. If you are going from Windows Vista Home Premium to Windows 7 Ultimate, you do not need to do a clean install. When you switch to a higher version, you're adding on the existing functionality, but when you're going to a lesser version, you're taking away functionality, thus the need for a clean install.
Clean installs will also have to be performed when upgrading from a 32-bit version to a 64-bit version, regardless of edition. Unless the user chooses to repartition or format the current partition, Vista's files from C:\\WINDOWS will be preserved under C:\\WINDOWS.OLD, just as when upgrading from Windows XP to Windows Vista.
As with Vista, each DVD includes the various editions. Unlike Vista, every edition of Windows 7 is a superset of the previous edition, so you will not lose any features when upgrading. Once you have some edition of Windows 7 on your system, whether you purchased it via an OEM or just upgraded from Windows XP or Windows Vista, you will be able to upgrade to a "more premium" version of Windows 7 by purchasing an upgrade key to unlock additional features, just as with Vista. This is called Windows Anytime Upgrade (WAU). For example, you could start off with Windows Vista Home Premium, upgrade to Windows 7 Home Premium, and then later choose to upgrade to Windows 7 Professional. "