Windows options advice

Windows upgrade is considered as retail, and can be freely transferred to another pc.

Since you are upgrading an old XP, and will no longer use it, you are ok on using an upgrade package. The old XP does not need to be installed.
Boot from the windows 7 dvd and do a clean install. If the old xp hard drive is present, you will be able to activate using the supplied upgrade product code.

If, for whatever reason that is not possible, after windows is installed, you have a fully functional os for 30 days. Insert the dvd again, and do an upgrade, and you should activate. This process is supported, and necessary when converting from 32 bit to 64 bit.

If you have a need for two or three upgrades, look into buying a family pack upgrade package which gives you three upgrades for about $140.

thank you, is there a way of checking (apart from the obvious looking at the sticker) if I have an OEM or retail Xp key? I dont want to buy the upgrade only to find its no use!

A slightly different take (same meat, different potatoes). Everything Geofelt stated is correct.

.. Take Old Computer, put in Bin, keep old Key, store under pillow for key fairy.
.. Get Upgrade version of windows 7 (Your choice, but recommend 64 Bit).
.. Insert Win 7 disk in new system and select CUSTOM Install. Install windows 7, DO NOT enter key at this time. Let windows do it's updates, load any need drivers, then load all programs you have on hand.
.. Pefrom the two steps listed at end.
.. Check system out for a couple of days to insure stable.
.. Enter Key and activate.

And the Two steps Ref: http://www.maximumpc.com/article/howtos/how_use_your_wi...
Step 1:
A true geek has never been intimidated by the registry, but lets face it, it's a mess in there. To access the registry you will first need to open up the start menu and type "regedit" into the search field, followed by enter. To find the proverbial needle in this haystack, you will need to navigate through the tabs listed on the left in the following order:

HKEY_LOCAL_MACHINE/Software/Microsoft/Windows/CurrentVersion/Setup/OOBE/ . If you don't like doing it the hard way just click Edit then Find and type MediaBootInstall into the search field, and press enter.

Once found, double click MediaBootInstall and change the "1" to a "0". Once you have finished this, simply click Ok and close out the Registry Editor.

Step 2:
Before we try to activate our copy of Windows, we need to reset or "Re-Arm" the activation sequence. To do this, simply open up the start menu and type cmd but instead of just pressing enter, you need to press "Ctrl" + "Shift" + "Enter" to run it as an administrator. You can also accomplish this by clicking the start menu, typing cmd into the search box, then right clicking the command prompt application and selecting Run as administrator.

Once the command prompt appears type slmgr /rearm and press enter. Next simply type Exit and hit enter again, after which it will ask you to restart your machine.

ADDED:
Can Read: http://www.zdnet.com/blog/bott/clean-install-with-windo...
Added. Does not matter if old XP was oem, or retail as both qualify for upgrade. (PS an OEM Ccan be transfered to new system IF mb dies A VIOLENT DEATH and ends up in the dust bin.
PS hold onto old XP key, don't let key fairy take it - should never need it , but on the very outside chance that microsoft ever ask, you have proof that you qualified for upgrade.  

It is a moot point. Upgrade can be done on oem or retail.

Upgrade packages will include both 32 bit and 64 bit dvd's so you are covered there also.

So if I do have an oem version, there will be no issues moving this to a new pc with an upgrade package? Will this original oem license then turn into a retail version for future use?

If this is the case, I will be better still upgrading my current Windows 7 oem to windows ultimate on my new pc at a lower cost again and have a better version?!

"(PS an OEM Ccan be transfered to new system IF mb dies A VIOLENT DEATH and ends up in the dust bin."

thanks again Chief, as i'm sure you can tell, I'm trying to save all the money I can on this build (it's my 3rd in about 6 months! lol). I'm really interested in that last point... If I 'accidentally' slipped with my screwdriver on my current PC when installing a new fan and went right through my motherboard, could I then move my old version of windows to the new build? (i'm not holding my breath on this, but it's worth exploring all avenues!)

I think you should consider the xp as being replaced with windows 7 upgrade, and no longer eligible for reuse.

Is there any feature of pro or ultimate that you really need? For a home user the answer is usually no.