HardOCP has a bit on the WindowsXP authentication stuff that seems to make a bit more sense. You only have to get a key created once and authenticate once no matter how many times you install and the only time you'll run into trouble is if the same key is used like 1,000 times.

Your product key is bound to the hardware in your system. If you change your hardware SIGNIFICANTLY, you can still reactivate. (In fact, only on HIGH volume keys with different hardware will MS stop accepting the pirate key.) ie. Customer has a product key, he can go through a FEW COMPLETE computer overhauls, use the same product key, and be just fine. NOW, if a product key is used in 1000 different hardware configurations, we don’t let THAT product get activated. The PID has then become worthless. Nobody can activate Windows with it. This makes PID sharing (the most common form of Windows piracy) a little more costly

Thats a bit more reasonable than the earlier information we were reading about the WinXP key system. Seems basically like the Half-Life or Quake3 key system except the key is generated dynamically the first time you install.