It will create a new catalog from your version 2 catalog so that you can still use version 2 - Read the release notes it explains all
Upgrade Notes
• To update your Lightroom 1 or Lightroom 2 catalog simply launch Lightroom 3 and you will be able to select and upgrade your previous Lightroom catalog.
• The Lightroom 3 catalog upgrade process does not erase or remove your previous Lightroom catalogs. If you wish to try the Lightroom 3 3'-day trial by upgrading your existing catalog, you may always return to earlier versions of Lightroom and continue using your previous catalog.
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NOTE: Any changes or work completed in your catalog once it has been upgraded to work with Lightroom 3 will not be available in previous versions of Lightroom. NOTE: The upgrade process will modify the image preview information of an upgraded catalog.(This information is stored in the .lrdata file that is located adjacent to a catalog file in the file system) Returning to a previous version of Lightroom will require that the previews be re-rendered. This can be a lengthy process for those with hundreds of thousands of images.
• Upgrading a Library from Photoshop Elements 6, Photoshop Elements 7 or Photoshop Elements 8 for Windows requires that Photoshop Elements be installed on the computer at the time of upgrade.
• Lightroom 3 beta catalogs may be upgraded using the same methods available for Lightroom 1 or Lightroom 2 catalogs.
• If you attempt to upgrade the same Lightroom catalog more than once, Lightroom will inform you of the location of the previously upgraded catalog.