That's a very good question,
IAHflyer! Let me try to summarize it to the best of my understand (and I am sure I will make a mistake somewhere along the way), thereby hopefully giving you all the answers to your questions.
There are two types of upgrade waitlists, the PA & PB list. The PA list is the Priority A list, which is the first one cleared, followed by the PB, or Priority B list, which is the second one cleared. When a 1K uses his/her upgrade instruments they are typically put on the PA waitlist, including when they give their SWU's/CR1's to others, meaning even a General Member with a 1K's SWU goes on the PA list.
Confirmable upgrade instruments, such as CR1's, SWU's, and miles can clear at any time. This means that if I apply for an upgrade today from coach to first on a two class flight (upgraded F is NF), and NF is available, I can clear immediately into First Class and be confirmed. The same is true for an upgrade to Business (NC).
As soon as there is no more confirmable upgrade space you get "waitlisted," which is where the fun starts. Like I said above, those with the right credentials get added to the PA waitlist, and others to the PB waitlist. The PA waitlist is sorted on a first-on first-off basis, meaning that the first person on the PA list will be the first person to get the upgrade. The PA list is totally cleared before the PB list is touched. That means that if upgrade space becomes available tomorrow and I add myself with a CR1 as a 1K today, I would trump a 1P that's on the PB list for the past 10 months. Of course this is technically how it works, and sometimes there may be some mistakes.
The list continues as such, except 500 milers, which can only clear 120 hours out for GS's, 100 hours out for 1K's, 72 hours out for 1P's, 48 hours out for 2P's, 36 hours out for 3P's, and 24 hours out for GM's. If the upgrade does not clear at the window (which is very possible, it's not that you get upgraded if there's a seat available, but rather it's still coming from the same inventory), you can still clear anytime until departure.
This whole order changes as soon as the flight is under "departure management," or DM. This is usually the day of the flight, about four hours out. Under DM upgrades are cleared first by status, then by fare basis, and lastly the time added to the list.
That's a pretty basic explanation of the workings of IM as I understand them, but someone feel free to correct me. Feel free to ask more questions, and I'll do my best.
