Whether you buy full boxed product, or an upgrade for your existing Office suite, you will be required to activate it, either by telephone or online, using the Product Identification (PID) number. If you don't register, then you'll only be allowed to run Office XP applications for a total of 50 times before you're locked out.
The controversial element is the system snoop, which collects signature data from your PC (device types and BIOS) to produce an ID code that's unique to your PC, which Microsoft holds on file.
You can perform a second installation on a notebook PC, but that's your limit. Any further installations due to system failures or hard disk replacement will require you to negotiate with Microsoft directly for permission. Either that, or you'll have to buy another copy.
It's too early to predict the success or failure of this security measure, but issues caused by the distribution of duplicate or hacked ID codes on the Web may cause unforeseen problems.