Activation itself requires online verification or a phone call, so MS knows how often that particular copy has been installed. As for the key itself, if you do a clean format each time round, it has no way itself of knowing that it was used already (either on the same PC or elsewhere) so can be used over and over with that particular CD, which is what activation is for to track that instead. I'm not sure if the activation key needed if you reinstall over the same hardware configuration will change since I don't know if the code you need to tell MS to get the activation key is partially randomly generated (since it's partially dependant on the hardware configuration) or not for each install.