According to the documentation, the upgrade version of Windows 7 just needs
the user to possess a qualifying XP license.
Qualifying means that either the XP version is a full retail version, or if the
upgrade version is OEM that the hardware is right.
However, the upgrade version checks nothing, so you can use it to do a clean
install of Windows 7, even on a blank new disk.
If you don't possess a correct XP license, this will also succeed,
although strictly speaking it is illegal.
The "upgrade" won't propagate your apps and drivers. If executed on installed
Windows XP, it will only kindly bundle your XP installation in the
See the article
Microsoft confirms Windows 7 install trick is legal.