It uses a unique hardware identifier hash, no key is required is what I am reading.
So once you've upgraded you should be able to do a clean install on the same hardware and have it auto activate (at least until you replace the motherboard)?
Seems like an annoying yet smart choice by microsoft and would explain the 1 year free upgrade option. As it means when people replace their PCs or upgrade hardware in over a years time they'll be required to purchase it in order to activate.