From what I have read the win 7 upgrade can be used as a full install. You are only supposed to use it if you are upgrading a qualifying version of windows. If I'm retiring/recycling my old XP machine and building a new one would it be legal for me to use the win 7 upgrade on my computer since I technically have a prior version? How would it be any different then slowly updating my old computer with all new parts and then putting it on with a fresh install?
What you're trying to do is combine an "upgrade" with a "move" of the OS to a new computer.
If you own Windows XP OEM, it's license is tied to the hardware you installed it on and ethically speaking you shouldn't use it (or it's license privileges) on any other computer.
If you own the retail version of Windows XP, it's license is portable and I wouldn't think there would be any ethical problem with using it as the basis for the installation of the upgrade version of Windows 7 on a different system.
Technically speaking, it is possible (with a little work) to install the upgrade version of Windows 7 as a fresh install with no prior OS on a new machine no matter what version of XP you have.