You cannot directly upgrade from Windows XP to Windows 7. The edition of either doesn't matter. Yes, you can use upgrade media on XP installs, but it's a destructive upgrade: All data will be lost and all programs removed.
You'll need to back up your data first (which is highly advisable even for an in-place upgrade), install Windows 7, restore all files, and reinstall all your applications. It's the only way.
That is good to hear. I can back-up everything that I know for sure that we, (My family), uses and needs. I mean, the total amount of memory was are taking up is around 30GB and we wont need everything we have, since the majority of the stuff is most likely on Windows 7 or we don't use.
~Edit~
Mind if I ask what programs comes with the Windows 7 update? I know stuff like Windows Media Player, Internet Explorer, and Windows Picture Viewer will be there but what about other commonly used programs like IfranView, Notepad, etc?