Installing Upgrade To Secondary Hard Drive

I have a bit of a strange question about installing the Windows 7 upgrade. I'll try to keep it as simple as I can. Firstly

1: I currently have Windows XP SP3 Home Edition installed (and activated) on my 160GB WD Caviar Blue hard drive, which has 8MB cache. It's getting a bit full now.

2. This hard drive is one of the few remnants of a Dell machine I bought a few years ago.

Surprisingly, the restore disk still works and activates, even though I've changed the motherboard and a number of other things over the years. My last reinstall was about a year ago, and I had no problems reactivating whatsoever - I didn't even need to phone Microsoft.

However I doubt it'll install and activate on a new hard drive - particularly as I've also changed the DVD drive since my last activation (as the old one broke), literally the only things remaining from the old system would be the RAM and the processor.

2: I have purchased a 500GB WD Caviar Blue with 16MB Cache

3: I intend to buy Windows 7 Pro Upgrade from TheUltimateSteal for £30. I'm a student, but will be graduating soon, so it seems sensible to take advantage of this offer while I can.

4. Clearly I can install Windows 7 in the normal way onto my current drive and use the 500GB drive for backing up my files, which I'll do if that's the only option.

5. However, if I did that I would not be taking full advantage of the extra cache of the new drive. It would be nice if I could use that for my primary installation to speed things up a bit.

So here's my question:

If I start the upgrade process having booted from the 160GB drive, but during installation select my 500GB drive as the target for the installation, will Windows 7 install and activate correctly? Will it recognise the pre-existing installation, even though it was on a different drive?

If not, then:

If I install my Dell restore disk on the new drive, and don't activate Windows (which presumably I won't be able to), and then run the Windows 7 upgrade on THAT drive, will Windows 7 install and activate correctly?

Basically, is there a legitimate way of installing a Windows 7 Upgrade onto the 500GB drive, on the basis of there currently being a valid XP installation on the 160GB drive?

I have no intention of continuing to use XP after the upgrade, if I am able to install and activate Windows 7 to the new drive, then this will serve only as a backup for my files.

Has anybody tried something similar and succeeded/failed?

I've already read the tutorials on here about doing a clean install of Windows 7. I'd like to avoid dodgy workarounds, as I'd rather not run into problems further down the line when it comes to updates and that sort of thing.