I think it would be ok to run the upgrade. Unless Windows 7 uses a different process, and unlike XP does not care if the "current" installation is legit or not, then he should fine. I have used legitimate XP to make pirated installations of XP become legal. As an IT professional and consultant, I had clients who had pirated installations of XP, and when they got the WGA notify message about having a "bad" copy installed, I simply ran the "good" copy of XP over the "bad" copy (like an upgrade), and that fixed the issue. I usually prefer to do clean installs, but depending on the client, I had to go with the upgradr option. I have never experienced doing this with Windows 7, so I can't say for certain, but I think it should work the same. I am a member of TechNet and TechNet Plus, I will find out and post back.
*****Side note**** I see the admin changed my avatar, haha. It's ok, I know why, and I apologize for the prior avatar. Could of just told me, I would have gladly changed it.