Should I upgrade or choose a custom installation?
Choose Upgrade if your current version of Windows can be upgraded and you want to keep your current files, settings, and programs. (If your version of Windows can’t be upgraded, you’ll need to choose Custom.) You can’t undo an upgrade or revert to a previously-installed version of Windows. 
Note: 
You can’t directly upgrade from Windows XP to Windows 7, but you can use Windows Easy Transfer to keep your files and settings. Then, you can use the Custom option to install Windows 7, and transfer your files and settings back to your computer. For more information, go online to http://go.microsoft.com/fwlink/?LinkId=142337.
The Custom option replaces your current operating system entirely, and erases your programs and settings in the process. You can also use Custom to keep your current operating system and install Windows on an available, separate partition of your hard disk (multiboot), or when no operating system is currently installed. Back up any files and settings you want to keep so you can restore them after the installation. You must manually reinstall your programs when the installation is done. 
The Custom option also includes the ability to format, extend, create, or delete partitions. To perform advanced disk management tasks like these, you need to start (boot) your computer using the Windows installation disc. These types of tasks can erase all of the data on your hard disk, including your files as well as programs and settings, so be sure to back up any user files you want to keep. 
Warning:
*	If you delete or format a partition, all data on the partition is permanently deleted, including files, programs, and settings. 
*	If there is an existing copy of Windows on the partition you selected and you don’t format or delete the partition, user files are saved to the Windows.old folder on the partition. After the installation completes, you can browse to that folder. 
*	We still recommend you back up your user files to an external location before performing a custom installation. For example, if you have encrypted files, you might not be able to access them after installing Windows unless you’ve performed a backup. If you’ve backed up your user files and then successfully restored them after installing Windows, you can delete the Windows.old folder using Disk Cleanup.