As always, you can install Windows 7 in two ways. You can perform a clean installation, wiping everything off your hard drive and starting from scratch, or you can perform what Microsoft calls an in-place upgrade. However, because Windows 7 will succeed not only Windows Vista, but also Windows XP, the upgrade paths are a bit... Complicated.
If you're using any version of Windows XP, there will be no in-place upgrade for you. You'll have to backup your important files, perform a clean installation, re-install your applications, and move your files back in. Windows XP is kind of old, so I can see how Microsoft didn't waste any time on implementing in-place upgrades for Windows XP users.
With Windows 7 being the logical continuation of Windows Vista, Vista users will certainly be able to perform an in-place upgrade, right? Well, yes and no. Only certain Vista editions can be upgraded in-place to certain Windows 7 editions. It's all such a bloody hopelessly complicated and arbitrary mess that Microsoft helpfully provided us with a very clear and easy-to-understand table that shows us exactly what we need to know (be sure to read the additional limitations at the bottom).
Of course, most of you will say "a clean install is better anyway", and I agree with you. However, most Linux distributions as well as Mac OS X are miles ahead of Windows when it comes to this matter, and they have little problems with performing in-place upgrades. It's a shame Microsoft is unable to provide a similar experience.
Luckily, more than 95% of the people get Windows via a new computer, so technically it's not that big of a deal. Let's just say it irks me.