Let's be clear about what we're doing here
First up, let's define what it is I'm describing. For purposes of this discussion, a clean install--or what Microsoft calls a custom install--is when you boot your PC with Windows 7 Setup media (typically a Setup DVD, but with this version it could also be a specially created, bootable USB memory device containing the Setup bits) with the intention of installing just Windows 7 on the PC. There could be a previous version of Windows (XP or Vista) installed on the PC already. You will either install Windows 7 to a separate partition or will wipe out the previous Windows version during Setup. If it's the latter, please--please--be sure to backup all your data first. Please.
A clean install with Upgrade media is just what it sounds like: You will perform a clean install of Windows 7 using an Upgrade version of Windows 7, instead of the so-called (and more expensive) "Full" version. Upgrade versions of Windows 7 are far more common than Full versions, both because they are less expensive and because Microsoft offered (and in some cases is still offering) exceptionally cheap pricing on Upgrade media.
Note: One such special offer, the Windows 7 Family Pack, consists of 32-bit and 64-bit Windows 7 Home Premium Upgrade media Setup discs and a single product key which can be used to activate three copies of the OS on three different PCs. The Family Pack costs $150, or just $30 more than a single copy of Windows 7 Home Premium Upgrade. It's kind of a no-brainer. But rememeber what you're getting there: The Family Pack comes with Upgrade, not Full, product keys.
But here's the paradox. While anyone with a valid, licensed copy of Windows XP or Vista qualifies for any Upgrade version of Windows 7--and by the way, that's pretty much every single PC user on earth--only Vista users can do an in-place upgrade, which is the install type for which Upgrade media is optimized. If you're an XP user, there's no way to do an in-place upgrade. So you have to perform a migration, which consists of three steps:
1. Backup your crucial data and settings using Windows Easy Transfer (it's on the Windows 7 Setup DVD) and make note of the applications that are installed, because you'll have to manually reinstall them again after the fact.
2. Perform a clean install of Windows 7 using the Upgrade media. I describe this process in this article.
3. Restore your crucial data and settings using Windows Easy Transfer (part of Windows 7) and then reinstall your applications.
Put simply, there are millions of people out there who will be performing clean installs with Upgrade media. Many people have experienced issues with Windows 7 upgrades, especially those trying to do clean installs with Upgrade media, but if you follow the advice in this article, you will get up and running. You will get a legally activated, legitimate version of Windows 7 installed on your PC.
Is this process bulletproof? I'm not sure yet, but I think so. In any event, here's a checklist of things to try, in order from least painful to most painful. One of these methods will work for you.
Note: In all of these methods, you should observe one simple rule. Do not enter your product key during Setup. Instead, you will attempt to activate Windows 7 manually after it is installed. So you can just enter your product key later.