Got questions about the more-mysterious-than-it-should-be Windows 7 upgrade process? Ed Bott has answers. For instance, the difference between full and upgrade versions of Windows 7.
The key is, um, the product key: When you punch in an upgrade key, setup checks whether or not it's being installed on a clean system or one that already has Windows. If you punch in an upgrade key on a straight up clean install, it's not gonna work. You have to use the earlier registry workaround for this from Paul Thurrott, or the infamous double-install trick leftover from Vista: Install Win7, don't enter the product key. Then do an upgrade install on top of that, and punch in your key. Boom.
More answers are over at ZDNet, and likely, even more are coming. Microsoft hasn't been exactly forthcoming with all of the upgrade details, so Bott's reverse-engineering the upgrade process to combat their steeliness. [ZDNet]