I tried to install Windows 7 SP1 RC2 and I can not find the backup files in add remove programs. I am reading that I may have to do a custom install which means all off my 39 software programs again. XP was easier. what a mistake Microsoft made not allowing an upgrade to Windows 7 from Windows XP without installing a clean copy everytime.

Whilst not always jumping too fast onto beta versions of software I am confused as to which backup files you need. If you have sp1(beta) installed the full release version of last week should instal without difficulty. (you may be able to uninstall the beta and then install the full release)
If you need back up files it seems to me it may be asking for the original disk from which you installed Win 7.
As to why they did not do an update the reason is that in some updates you can use the old systems files, but in others (as in the change from FAT 32 to NTFS) file system (win 95 ,to XP for example) the whole structure of the disk had to be changed and that just cannot be done via an update it has to be a clean install, same with win 7.
best of luck

I was trying to remove the RC1 version and looked in the Add remove programs and it is not there under updates that were installed. I checked in disk cleanup and it is not there thoses are the backup files I was told I need to uninstall RC1. I remember reading about a line in the registry to foll windows into thinking it is the original and not the SP1 version. Do you know what that is?

A lot depends on your knowledge of the registry!
if you have little or no knowledge then you can easily and completely screw up the machine so that only a reinstallation will get it going.
If you have a good working knowledge or are prepared to work towards that then although I do not know the exact reference, by using the search facility inside regedit then you can find the entries in the registry that refer to SP1.
However removing them does not remove the files that were changed when SP1 was installed. (it just means the processor will not be able to use those files that depend on the registry entries.)
It is possible that either Microsoft knowledge base or Google will give you the exact references.