WindowsSecrets.com's latest newsletter also has this information. "The secret is that the setup program in Vista's upgrade version will accept an installed copy of XP, W2K, or an unactivated copy of Vista itself as evidence of a previous installation." (Emphasis theirs!) They also address the ethics issues.

Why is this important? Because a clean Vista install is strongly preferred to an in-place upgrade install (munging your existing XP installation so it's now a Vista installation); but Microsoft does not allow this: "you cannot use an upgrade key to perform a clean installation of Windows Vista". This same Microsoft Knowledge Base article then provides a workaround, the same thing discussed by DailyTech and WindowsSecrets: "Start the installation from a compliant version of Windows, such as Windows Vista, Microsoft Windows XP, or Microsoft Windows 2000. After you have started the installation, you can select Custom at the installation choice screen to perform a clean installation."

I'm glad for this particular huge security hole, but it makes me wonder how many more they are.