Technically speaking you cannot in place upgrade from exchange 2007 to exchange 2010 you need to transition.if you need to use the same hardware the only alternative you have is visualization.
You will need one server running windows 2008 64bits (or 2k8 R2) with enough disk storage to accommodate all of your mailbox databases.
You have 2 options
Option 1: (already proposed by LCNW)
install exchange 2010 on the VM, migrate from 2007 to 2010, format the hardware then install 2010 on the physical and migrate again. This is somehow a long way and you are doing things twice
Option 2:
Is use P2V (physical to virtual) feature of HyperV to convert your exchange 2007 server to a virtual machine thus freeing the physical server. Format the physical server and install exchange 2010 on it and migrate only once
more info about P2V
http://technet.microsoft.com/en-us/library/cc764232.aspxanother option
http://williamfaulkner.co.uk/2009/01/easy-physical-to-virtual-p2v-for-hyper-v/
