Could it be the backup software has altered the file system in a way making Windows not like it? Do you have any copies prior to installing the software? Have you tried uninstalling the backup software? Maybe if you restore and don't allowing the backup software to run, it won't do whatever it might be doing. Maybe remove the backup software and do some type of repair to your install. I use the word backup rather than clone because cloning might be interpreted as doing something illegal. And you are aware, according to the information I have, the Vista install will not be able to be activated after you do an update from it, but if you are having a Win 7 Party, you probably have better information than I.
Since you brought up the point, I use Acronis to do my backups since my version of Vista does not have Windows backup. I wonder if that might cause problems for an in place upgrade for me. Let us know what happens.