Windows XP is not directly upgradeable to Windows 7 so why even waste time running the Upgrade Advisor and since this is a Virtual Machine just create a New Virtual Machine selecting the version of Windows your using and if you're using upgrade media then use the information in "[Clean Install Windows 7 with Upgrade Media|http://www.winsupersite.com/win7/clean_install_upgrade_media.asp]" to install/activate it. Method 2 has worked just fine for me.
You can then, if you want to or to comply with an upgrade license, just delete the Windows XP Virtual Machine after you've backed up your user data and have Windows 7 up and running unless you don't have enough room to have both.
If you want to transfer files and settings then have a look at:
Windows Easy Transfer for transferring from Windows XP (32 bit) to Windows 7
Or
Windows Easy Transfer for transferring from Windows XP (64 bit) to Windows 7