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Clicking it will allow you to 'extend' Partition 1 into the unallocated space.Unlike some partitioning programs that allow you to resize a partition in two directions (larger/smaller), the 'extend' command uses the current size of the partition as the minimum size and allows you to increase or 'extend' it to include the available unallocated space.Unlike XP and previous Windows offerings that stopped dead if you didn't have a product key, this is no longer the case with Vista.
The second item of note is if you want to 'Upgrade'.
you need to start the installation from inside Windows.
Once those two items have been completed the [ Next ] button is activated. Simple choice; click [ I accept the license terms ] and the install continues.
If you decide not to check the box you'll want to make use of that red 'X' in the upper right hand corner of the screen. Upgrade or Custom are the choices, but as you can see in this case Custom is the only option. The first is under Custom where it states you can use this option to make changes to the disks and partitions. You can create and delete partitions and resize a partition using the 'Extend' command.
There are a couple of different variations on this screen depending on system and configuration, but essentially you simply press the Install Now button to proceed.