Windows 7 will not do an in-place upgrade from XP. So you will need to save all your data to another partition, or preferably a different hard drive before doing an upgrade install. Saving to optical disks might be a solution if you don’t have much to backup.
Once you have everything saved, you can start the install with the Win7 disk, and if you have purchased the upgrade version it will look for the previous Windows operating system. You will then be instructed to do a custom installation, where the copy of XP gets deleted and Win7 goes in its place.
Win7 may or may not have all the drivers you need. I downloaded the latest audio and video drivers for my system and installed them over the generic ones that Win7 put in.
Once drivers are done you will have to reinstall your programs of course.