Edit: procedure updated to clarify certain key steps
a) at no time during this install should you allow Vista to connect and download automatic install updates. Perform the updates AFTER you have completed the full installation procedure by visiting Microsoft's Update site.
b) don't begin installing any third party drivers or applications (except for network drivers - if your's are not already installed by Vista setup) until you have completed ALL steps below.
c) if you are trying to "cheat" and use this procedure on a second system, be aware that you will NOT be able to activate your "copy" since the first activation binds your Product Key to the hardware you used the first time around. This procedure is intended to be used to recover from a disaster such as hard drive failure or massive virus infection -- etc.
Now on to the steps:
1. Start with a freshly cleared hard drive - or a newly formatted partition for the new Vista install.
2. Boot with the Windows Vista Upgrade DVD.
3. Proceed with the installation.
4. Do not enter a Product Key when prompted. You will do that at a later step instead. Leave the fields empty and move along.
5. When prompted, select the Vista edition that you have. (Important, make sure it's the same version for which you have the paid key.)
6. Install Vista normally. It will enter into Evaluation Mode for 30 days.
7. Once the install is complete and you are at the desktop for the first time, restart the DVD-based Setup from within Windows Vista using the original Vista Upgrade DVD.
8. When asked whether you wish to perform an Upgrade or Custom (advanced) install, choose Custom (advanced) and perform a clean install of Vista onto the same partition you chose the first time around.
9. Enter your Product Key when prompted.
10. After the second setup run is complete, and when you are once again at the desktop, delete the "c:\windows.old" directory which contains files that will no longer be used from the first Vista installation.
11. Allow Vista to activate your freshly installed system online.
12. Force your first set of critical patches and updates from http://update.microsoft.com.
13. Install any other third party drivers and applications at this time as needed.
When you are finished, you should have a fully functional and activated copy of Vista running on your legal upgrade key.
At least, unless Microsoft "fixes" this workaround . . .