From the
Windows Blog:
"Upgrade" versions of Windows 7 require Windows XP or Windows Vista to be installed on your computer. The Windows 7 setup process will look for a previous version of Windows on the computer during installation and if a previous version is not found, activation will not complete successfully using the Product Key for the upgrade license.
If for some reason you need to reinstall Windows 7 and have the upgrade version you will be required to install a previous version of Windows before installing Windows 7.
Upgrade versions require Windows XP or Windows Vista to be running on your computer before installing Windows 7. Full versions of Windows 7 don't require a previous version of Windows to be running on your computer. Both upgrade and full versions contain the same features. If you want to format your hard drive when installing Windows 7, you will need the full version. In general, choose the full version of Windows 7 if you don't have a previous version of Windows on your PC. Choose the upgrade version if you have Windows XP or Windows Vista on your PC.