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You can get the Windows 7 upgrade version since you have the Vista OEM. It is legal and safe.
There's no need to format your HD before you do the install. You can do it during the install.
Have a look at this Seven Forums tutorial, Clean Install with a Upgrade Windows 7 Version
, using option one is the best choice. Option two will work also.
You can leave Vista installed, when you get to step 7&8 of Clean Installation with Windows 7
, choose Drive options (advanced) and you can format the Vista partition. Then continue with the installation.
This way Windows 7 will see the previous installation and your Activation should be without incident.
There has been reports of successful installations formatting the partition first and then booting the install disk and getting it activated, and some people have found that it didn't work. There are steps you can do to get it activated but, the format during installation method will give you the same result and easier activation.
Run the Microsoft Windows 7 Upgrade Advisor
first to find out if there will be any system, program, or devices issues before you start the installation.
To help make the re-installation of your programs easier use Windows Easy Transfer - Transfer To & From Computers
, you will still need to install the programs. After they are installed run the WET to computer. This will transfer your personal files and user settings from Vista. Backup your browser bookmarks as they will not be transferred.