I just tested this with Windows 7 Upgrade disk:
MS makes it clear that using Windows 7 Upgrade disk with XP requires a clean (Custom) install, which most people assume means over the same XP. This can be done, and places your files in windows.old for redistribution. This is only an option for Vista, since you can do an in-place upgrade which reinstalls your programs, files and settings.
You can also direct the clean install to another formatted partition or second primary formatted HDD which allows for a cleaner install. The problem is that you may still have XP in the first partition on the same HDD, which you probably will not want for long, and a laptop is hard to connect to a second HDD. Plus, an OS in an outer HDD partition takes a fraction longer to be read by the laser.
But there is a way to install from XP with an Upgrade disk to to a clean formatted first partition. Here is the way I did it:
Use a Partition manager like Paragon or Easeus to copy your XP partition over to a partition other than the first (or install XP to another partition) then use EasyBCD to Add it to the Boot Menu if necessary.
Now comes the hat trick: Boot into the new XP partition and use Disk Management to mark it active, then go to Control Panel>Folder options and show hidden system files. Make sure boot.ini, ntldr, and ntdetect.com are in the roots of both OS drives so you can boot back into XP later.
Now delete and format the first partition using Disk Management (or Easeus) from the XP desktop, then without rebooting install WIndows 7 to the first partition. After install, you can copy files over from XP via explorer and then hide or delete the XP partition, because you now have the best operating system ever and it's installed on formatted metal from an Upgrade disk.
Be sure to use Windows 7's great new imaging backup to image your installation after you get it like you want it, so you'll never have to reinstall again.