One of the first things you will want to do is check your hardware. If your computer was made in the last few years, you more-than-likely won't have a problem. If you're not sure about your current hardware situation, Microsoft offers a Windows 7 Upgrade advisor at their website. The advisor will perform a scan of your system and display a report that lets you know if you meet the requirements. Should there be a problem, the report lets you know what your options are for the upgrade.
Another thing you must understand is that you will have to perform a custom installation. Upgrading from Windows XP to Windows 7 will not allow you to keep all of your settings and applications. A custom installation gives you the option to install Windows on a specific drive or partition, or completely replace your old operating system. When you do the complete replacement, a folder called "Windows.old" will show up on your hard disk and while it will contain your Windows, Documents, Settings, and Program Files, your applications will no longer be in working order. This means backing up and transferring important data, reinstalling applications, and reconfiguring your settings.
It's always helpful to have an inventory of all of your applications. You'll also want to make sure they are compatible with Windows 7. Once you have your list in place, you can gather up the information for what you'll need once you've got Windows 7 installed including installation CDs and various websites from which you've downloaded applications.
One thing you may want to consider is a multiboot configuration. This means having both Windows XP and Windows 7 at your fingertips, which can help make the switch a little smoother. All you have to do is reboot into Windows XP at any given time to see exactly how something is installed or configured. To do this, you must install both XP and 7 on the same hard disk but on separate partitions. To make room for Windows 7, you will have to repartition your hard disk and there is software you can purchase to help you do this. Once you're finished, just set Windows 7 as your primary operating system and remove Windows XP all together.
As with any major change you make to your computer, you'll want to back up all of your data. You're more than likely going to use either a third-party back-up program or Windows XP's native Backup Utility. If you're using a third party program, make sure you check with your manufacturer to see if it will be compatible with Windows 7. If you're not sure or don't trust either backup system, you can, of course, make copies of all of your data and store it on CDs and external hard drives.
Now that you know you will need to transfer your data, how will you do it? You'll probably want to use a program that will scan your XP system to find all of your data and settings and that can transfer the information to Windows 7. Luckily, Windows 7 has an Easy Transfer feature that can do this for you, but. The transfer utility should come embedded within Windows 7, but also as a separate DVD.
Something else you can do to be prepared is become familiar with Window 7's new user interface (UI) as it is very different from that of Windows XP. To avoice what many call "UI Shock," you can visit Microsoft's Windows 7 webpage. That will give you an idea of what to expect once you've installed Windows 7. The webpage features a Windows 7 Features section and a Windows 7 Help & How-to section. Microsoft's website also features a Windows Training Portal which includes Windows 7 "Learning Snacks" (interactive presentations) and Microsoft Press Sample Chapters from upcoming Windows 7 books.
Finally, this seems simple enough but ask questions and share information. So many people will be switching from XP to Windows 7; you most certainly won't be alone. Visit technical forums and websites and connect with others who are in your shoes.