I was so hoping to have better news to share, but with all the conflicting reports and my own troubles testing this while on the road, it's been a messy 24 hours. However, after staying up late last night and working through a few different scenarios, I think I do have a (fairly) simple way to clean install Windows 7 with Upgrade media. That is, it should be easier than the old "install it twice" hack that I previously documented for Vista (though that should still work as well).
Put simply, the goal here is to clean install Windows 7 on a virgin, unused PC. You can boot and run Setup with the Upgrade media for Windows 7, but when you go to activate, it won't work.
Thanks to Kevin Fisher and a bit of testing, I have a simple workaround that does work.
After performing the clean install, ensure that there are no Windows Updates pending that would require a system reboot. (You'll see an orange shield icon next to Shutdown in the Start Menu if this is the case).
Then, open regedit.exe with Start Menu Search and navigate to:
HKLM/Software/Microsoft/Windows/CurrentVersion/Setup/OOBE/
Change MediaBootInstall from "1" to "0".
Open the Start Menu again and type cmd to display a shortcut to the Command Line utility. Right-click this shortcut and choose "Run as administrator." Handle the UAC prompt.
In the command line window, type: slmgr /rearm
Then tap ENTER, close the command line window and reboot. When Windows 7 reboots, run the Activate Windows utility, type in your product key and activate windows.
Voila!
A couple of notes here.
Others have reported that simply installing Windows 7 using Upgrade Media and then activating just works. It certainly doesn't hurt to try this, but my guess is that there was a version of Windows on the hard drive that Setup detected, thus making the install and activation work properly.
I have not tested this yet, but I assume if you launch Setup from within your previous version of Windows, choose Custom, reboot, and then wipe out the previous Windows version during Setup, that that will work as well.
And I'm just about positive that the old "install twice" hack from Vista will work too.
I will test all of this thoroughly when I get home. But for now I wanted to cut through the baloney and cut and paste jobs out there and give you something that really does work.
Again, thanks very much to Kevin for this information.