Actually, you have to shut down the VM before you can upgrade the hardware. When it comes back up, it does so with the new virtual hardware.
I recently did this and encountered one snafu. Not a major issue, but an annoyance. I found that when I try and edit the TCP/IP properties for any of the NICs after the upgrade, I received an error stating that another NIC on the machine already had that IP Address. This was even though I didn't change the IP Address or any other properties.
What basically happened is in the Vhardware upgrade it put "new" NICs in the Virtual machine. The old ones are still there in Windows, but they are "ghosted". Since this "ghosted" nic had an IP Address bound to it, it would complain if you tried to assign that same IP to the new VNIC in your system.
To remove the annoyance, see the following:
Open a command prompt
Type: set devmgr_show_nonpresent_devices=1
IMPORTANT: Type this in the same command prompt window: devmgmt.msc - This must be typed in the same cmd prompt window as the set command or you will not see the ghosted adapters
Select View -> Show Hidden Devices
Right-click any ghosted adapters named "VMWare..." and uninstall. Leave the RAS Adapter (it won't let you remove it anyway).
Reboot.
