I had an exclusive meeting with a Nintendo representative (named Dan M(he asked me not to reveal his name, so an initial will have to do)).
He told me some limited-access details to this exact question, as well as a few more.
The way I understand it, it'll be somewhere right after the third dungeon boss. You'll be traveling through a field as you are on your way to what you think is the next dungeon (or some other goal(? this part wasn't too clear)). Suddenly, a wild Scorpion will appear. I'll look just like the other Scorpion (that we've seen the demo play of), and in fact in all aspects (except the very next one I'll explain) it is. The only difference is, it's the only enemy to appear in this patch of grass, because it's a holy place. Upon defeating it using the Skyward Sword (it's somehow immune to all other weapons, or you will have to come back and use the sword to kill it again, or something like that), as soon as the battle's over, you'll hear some music like "duu-du duu-du duu-du-duu-doo duu-du duu-du duu-du-duu-doo duu-du-....". The sword will start flashing, it will emit a light turning the entire surrounding area pure white as it gather's the power to repel evil from the sacred place around itself, while itself somehow turns black. It will then begin flashing between the Skyward Sword (or the shape of what it looks like), and the shape of the master sword. This flashing will get faster and faster, until finally it immediately stops on the Master Sword. All of the light will flow into it, and presto! You will have your new sword.
Unfortunately, because of the magics of the Skyward Sword, it had to evolve to hold the power to repel darkness, which means that now enemies will immediately swarm this place, giving you an immediate challenge with the motion plus controls for your new sword. However, the downside is that now Phi cannot reside her spirit in your sword, and a large part of the storyline afterwards is trying to find her, or find out what happened to her.
Okay, that's all I know and can tell you. Please let me know immediately after you have read this so I can delete this. No need letting Nintendo know I'm leaking secrets....