Paul Thurrott had direct contact with Microsoft on this issue:

If you run Setup from an existing install of Windows ... Windows 7 will always activate.

If you boot your PC with Windows 7 Upgrade media ... and there is an existing install of Windows on the first partition, Windows 7 will always activate. If the existing install of Windows is on some other partition, Windows 7 should still activate. There are instances in which this won't work--especially when people really muck around with directory structures and so on, but it should activate.

There is one major and important change between Windows Vista and Windows 7 Setup with regards to compliance checking ... In Windows Vista, Setup did the compliance check (to see whether you have a valid prior version of Windows and thus qualify for the Upgrade version) after the phase where you can format the disk. This means you could actually format the disk, thus destroying your previous install, and then fail the compliance check. Microsoft fixed this in Windows 7. That means you can format the disk during Setup: Windows 7 will still activate because the compliance check occurred earlier.

A recovery partition will never qualify you for the Upgrade version. Setup does not understand or parse recovery partitions.

If you clean install Windows 7 with Upgrade media and it does not work for some reason, Microsoft's recommendation is that you call Microsoft Support immediately ... They will get you activated immediately, no questions asked, and the call is free. You're provided with free support calls as part of your purchase.

More scenarios: Talking Windows 7 Upgrade Media with Microsoft - SuperSite Blog

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