Note: I’m not a lawyer or have any legal background, I’m simply explaining my understandings of the EULA documents for the Windows XP operating system.

First step, is to read your current EULA, if you are on the system in question you can follow these directions:

“How do I find the XP version info and EULA?”
You can access the XP Version Information and EULA [End-Users Licensing Agreement] by typing winver from START–>RUN text box.
The Version Information is displayed in the dialogue window and the EULA is accessed from the End-Users Licensing Agreement hyperlink.
The XP EULA can also be accessed from RUN or the Command prompt:
Type: X:\WINDOWS\system32\eula.txt where X is the drive letter of the Windows installation.

XP Home: OEM License

1. GRANT OF LICENSE.
Manufacturer grants you the following rights provided that
you comply with all terms and conditions of this EULA:

1.1 Installation and use. You may install, use, access,
display and run one copy of the SOFTWARE on the
COMPUTER. The SOFTWARE may not be used by more than
two (2) processors at any one time on the COMPUTER,
unless a higher number is indicated on the COA.

1.2 SOFTWARE as a Component of the COMPUTER - Transfer.
This license may not be shared, transferred to or used
concurrently on different computers. The SOFTWARE
is licensed with the COMPUTER as a single integrated
product and may only be used with the COMPUTER.
If the SOFTWARE is not accompanied by HARDWARE,
you may not use the SOFTWARE. You may permanently
transfer all of your rights under this EULA only
as part of a permanent sale or transfer of the
COMPUTER, provided you retain no copies of the
SOFTWARE. If the SOFTWARE is an upgrade,
any transfer must also include all prior versions
of the SOFTWARE. This transfer must
also include the Certificate of Authenticity
label. The transfer may not be an indirect transfer,
such as a consignment. Prior to the transfer,
the end user receiving the Software must agree
to all the EULA terms.

XP home is a pretty tight EULA, very little room to play, but at a low enough cost it is reasonable to purchase a 3 pack of OEM, a few additional hard drives and more ram to build yourself a robust virtualization test system. OEM copies can be purchased with new systems or new hardware, such as memory or storage upgrades.

XP Pro EULA:

1. GRANT OF LICENSE. Microsoft grants you the following rights provided that you comply with all terms and conditions of this EULA:

1.1 Installation and use. You may install, use, access, display and run one copy of the Software on a single computer, such as a workstation, terminal or other device (”Workstation Computer”). The Software may not be used by more than two (2) processors at any one time on any single Workstation Computer.

14. SOFTWARE TRANSFER.Internal . You may move the Software to a different Workstation Computer. After the transfer, you must completely remove the Software from the former Workstation Computer. Transfer to Third Party . The initial user of the Software may make a one-time permanent transfer of this EULA and Software to another end user, provided the initial user retains no copies of the Software. This transfer must include the Software and the Proof of License label. The transfer may not be an indirect transfer, such as a consignment. Prior to the transfer, the end user receiving the Software must agree to all the EULA terms.

The pro license does allow for transfering, which means if you have a Windows XP Pro workstation, you can delete the hard drive, install a linux distro of your choice, and then install XP Pro inside of a Virtual Machine, which is pretty nice. There are no restrictions about where or how you can run XP, unlike Vista (more on this later), as long as you have 1 product key per installation. If you have a XP home computer, with 2 virtual machines inside of it, both running XP home, you will need 3 unique product keys. Even though both virtual machines will be identical hardware configurations they are multiples copies. One example, which for legal reason will assume is against the EULA, is having 1 copy in a VM, and transfering it around on a thumb drive or similar device. By having the virtual machine hardware configuration setup by the configuration file and virtualization software it will not vary as the machine moves between computers. This idea of a portable virtual environment is something more people are going to want to try. With the physical and size requirements of Vista being so high, people will look into using Windows XP as a portable environment.

sources:
http://www.michaelstevenstech.com/
http://www.eros-os.org/pipermail/
http://www.microsoft.com/windowsxp/
http://www.microsoft.com/piracy/
http://forums.microsoft.com/Genuine/
http://www.vmware.com/community/
http://forums.microsoft.com/genuine/
http://proprietary.clendons.co.nz/licenses/
http://www.newegg.com/