Yes, you're right that you will need to do a clean install of Win7 on an XP system, as there's no direct upgrade path. Apparently, the upgrade version will check if there's a legitimate, activated copy of Windows on the PC before it lets one proceed (someone might be able to confirm if this is true or not).
Well, on a new hard disk it would appear that one would have to (going by the above) install XP first & then Win7, but there are ways around this click here.
Doesn't have to be retail - you can buy an OEM copy if you like as well. The big downside with OEM is that one cannot transfer the licence to another PC if the original PC dies. Retail licences can be transferred an unlimited amount of times, as long as it is uninstalled from the previous system. G