I works as follows: (Someone please correct me if I'm wrong but this is accurate as far as I know.)
1) If you have a legal, licensed version of Windows XP, you qualify to purchase one of the Windows 7 upgrade editions. To my knowledge, you will at some stage need to supply your XP key during Win7 installation (so yes, it must be "validated", so to speak).
2) BUT!!! You cannot do an in-place upgrade from XP to Win7. Thus, you will use your Upgrade disc to do a clean installation of Windows 7 (bit confusing, but there you are).
I will definitely go this route, since the Windows 7 upgrade editions will apparently be significantly cheaper.