In concept, it's not as half-assed as it looks but as always, MS totally **** up the implementation.
From what I can gather, you're only really hassled if your CD key is invalid. If you're legit then it's pretty much business as usual. The way it checks the validity of your key is also particularly interesting. MS are finally checking peoples keys against a list of ones they know they have issued - something they should been doing from day one instead of forcing this activation crap down peoples throats.
MS would lock down security updates too if they could but they realise that if they did, there'd be countless machines out there all capable of acting as vectors for all manner of nasties simply because they were denied access to the proper patches. This is the real flaw in the system. By making exempt the only thing they provide that people really care about they're reducing the effectiveness of the system to almost nil. People will carry out without IE, WMP et al but critical security patches are a different matter entirely.
However, the effectiveness, or lack thereof, of the system is irrelevent. The real issue here is that MS, like the RI/MP AA, keep persisting with trying to force people into line without even trying to work out why they're falling out of line in the first place and rectifying it. I'm sure MS would find their piracy rates would take a nosedive if they didn't insist on charging such obscene amounts for their stuff. They realise this to an extent, one look at the differential between Retail and OEM/Academic pricing is enough proof of that, but won't reduce the price across the board because they're out to make a quick buck.
