The upgrade installs only work on already present copies of the OS, so yes, you will have to install vista on the SD and then run the upgrade. Even if your copy was OEM, it is tied to the MOBO, so it will let you re-install it on an infinite number of HDD's, as long as they are hooked to that MOBO!
And you don't have to deactivate the copy, it will realize it has already been activated elsewhere when you reinstall, and likely will prompt you with a number or something to call at Microsoft to get your copy "switched" (I dunno if they provide you a new key or what, I haven't had to do this). I think you get 30 days with full features anyways to do this process.