Microsoft has explained how Windows Vista will handle activation and validation. There will soon be three types of licenses: retail, volume, and OEM.
Heise.de posted an article that explains how exactly licences will be handled
There will be a special kind of key for hardware manufacturers who preinstall Vista. Microsoft has explained that this version of Vista will be integrated to the PC so that it only runs on this manufacturer's hardware. This linked version of Vista will apparently be activated ex works without any connection to a server, and the recovery DVDs created in the process will also already have been activated. But if a large part of the hardware is exchanged, the operating system has to be reactivated.
Finally, there will be two types of special installation keys for major business customers: first, those that can be activated like retail keys but allow for multiple activation; and second, those activated by a central service in the local network. The latter requires the use of at least 25 physical PCs with Windows Vista or 5 with a Longhorn server. If the operating systems are running in virtual machines, they can also be activated by this service, but these machines do not count towards the minimum member required. They also have to be reactivated via the service every 180 days.
Each time, users have 30 days after installation to activate. After this period, Windows will only work with "reduced functionality" without an installation key: a browser will then be launched where the user can purchase a Vista license, but there are no desktop icons and no start menu. After an hour, Vista logs the user out without any warning, but does not shut the computer down, allowing the user to log on again immediately.
Vista responds a bit differently when activation succeeds but Microsoft later declares the installation key used to be illegal during a check of WGA. Windows then switches into a different mode of "reduced functionality": the new Aero design (with a transparent window frames and 3-D window affects), ReadyBoost, and the Defender anti-spyware refuse to run, Vista only downloads critical security updates, and a notice appears on the desktop that this installation of Vista is illegal.