...I don't understand what the above point is referring to.
Upgrading to Windows 7 is seemless if you're upgrading from the equivalent version of Vista. This means, if you have Vista Home Premium x86, you can upgrade to Win7 Home x86 without losing any data. Same applies for Business/Professional, and Ultimate.
If you're going from XP, or trying to upgrade to a different version (say, Home to Ultimate), or going from x86 to x64 (or visa versa), you have no choice but to perform a "Custom Install". In this case, your old Windows folder will be renamed to Windows.old and Windows 7 will install to a new Windows folder. Any other files will be left alone, but any installation or user settings (all of which are stored in the registry) will be lost.
There is a program to help you in saving some user settings (offered on the Windows upgrade center website), but it will tell you to reinstall just about every program you had.
Personally, I think it's useful to start fresh sometimes. Get a new Hard Drive Drive (which are fairly cheap these days - 1GB Samsung Spinpoint F3 for £60), install a fresh copy of Windows on it, and use your old drive as a backup. You can never have too much space in a HDD.