Windows 7 upgrade problem

I have a Dell laptop running on Vista.
I put in the Win 7 cd.
When i clicked install I to the 2options

-upgrade
-custom

I selected upgrade so I could keep the files on pc untouched.

Then this popped up:

COMPATABILITY REPORT
The computer started using the Windows Installation Disc, Remove the instalation disc and restart your computer so
that windows starts normally. Then, insert the installation disc and restart the upgrade, (Do not select "Custom
(advanced)" to perform an upgrade. " Custom (advanced) installs a new copy of Windows and deleted your programs and settings.)

How am I going to install win 7 and keep files?
Can i install the win7 when im logged in?

Whats a compatability report?

A Windows upgrade is performed in place when you're booted on the desktop. A compatibility report run by the installer alerts you to any potential issues that might interfere with an upgrade. If they are minor they can be safely ignored. Of course if it turns out you cannot do an in-place upgrade, your only option is to back up your current data and do a clean install.

Thanks, working perfect.