You are required to register your computer (online or using the phone) within N (= 120?) days of buying the OS. At that time, XP computes a hardware signature of your machine, which is used to generate a hash/ key which is then stored on your computer. Should the computed signature change subsequently for your system then you lose the authorisation. The signature could change if (a) you modified your system hardware significantly or (b) you attempt to install the same copy of XP on some other system and activate it using the hash/key. In case (a) or (b) is a legitimate change, you are required to call Microsoft to get a re-activation key. Of course this means that anyone can reuse an XP license by claiming to have changed their hardware when obtaining a new key for their new computer -- this works because there is no periodic check of any sort (as per Microsoft) i.e., the check happens only within your computer: to repeat, a hardware signature is computed periodically and checked against the stored key (*).
Here is more info:
Annoyances: http://www.annoyances.org/exec/show/article03-200 Microsoft: http://www.microsoft.com/windowsxp/evaluation/features/activation.mspx Also: http://www.aumha.org/win5/a/wpa.php
--ravi
(*) Any requirement from Microsoft that the key be periodically renewed online (or by phone) would be considered onerous given their licensing model. Many software vendors are moving to a usage fee model these days, by going to ridiculous lengths to portray themselves as a service (and hence needing renewal) rather than a product.