AFAIK they note the serial numbers/hardware codes of the hard disk and motherboard for the activation key. They allow up to 3 hardware changes for re-installation after which one has to contact M$ and give reason for so much of hardware change in one system ( single user license ).
why so, main ne pura paisa diya hain, main hardware change karu meri marzi! why should I be answerable to m$ for "so many hardware changes?" first of all this is the biggest practical issue that free software addresses. if I have paid for that copy of gnu/linux, I have the entire right to do what I want to do with the system. but if even after paying I only get right to use in a limited way, I can't except this things. so we become terrorists of IT who r called crackers or pyrats. regards, Krishnakant.