I searched google. "Windows XP activation"
The very first link covers it.
How does Microsoft Product Activation work?
Product Activation works by validating that the software's product key, required as part of product installation, has not been used on more PCs than is allowed by the software's end user license agreement (EULA). In general, Windows XP can be installed on one PC and Office 2003 or Office XP can be installed on one PC and the laptop computer used by the user of the one PC. (For specifics, please see the EULA accompanying your product.) Product key information, in the form of the product ID, is sent along with a "hardware hash" (a non-unique number generated from the PC's hardware configuration) to Microsoft's activation system during activation. In Windows XP SP1, the product key itself is sent in addition to the product ID. Activation is completed either directly via the Internet or by a telephone call to a customer service representative. Activations on the same PC using the same product key are unlimited. Product Activation discourages piracy by limiting the number of times a product key can be activated on different PCs.
How many installations can be made with one product license? Has this changed with the introduction of Product Activation?
The underlying principles of Microsoft's software licenses have not changed. Microsoft's End User License Agreements (EULAs) have always stipulated the number of PCs that software can be installed on. Product Activation does not change that. Office XP or Office 2003 may be installed on one PC. The primary user of Office may also install one copy on a laptop computer for their exclusive use. To install Office XP or Office 2003 on more than these two devices, another license of the product must be acquired. Licenses for Office XP or Office 2003 acquired preinstalled on a new PC are single-PC licenses that cannot be transferred or installed a second time on another PC or laptop computer. Windows XP may be installed on one PC. There are no secondary use rights (e.g. no "laptop clause") in the Windows XP EULA. The aforementioned licensing terms have not been changed due to Product Activation. Some special licensing programs (such as the Microsoft Developer Network) provide additional licensing terms. Please check your specific license agreement or EULA for specifics. Re-installation and re-activation on the same PC can be done an unlimited number of times. Pricing and licensing details are available for Windows XP and Office 2003.
What happens when you try to install and activate on more PCs than the end user license agreement (EULA) allows?
Per the EULA, installing on more PCs than the EULA allows would be in violation of the EULA. Technically, product activation does not limit the number of PCs the software can be installed on. It would be possible technically to install the software on, for example, 100 PCs. Activation would fail though on 99 (98 for Office XP or Office 2003) of those 100 PCs thereby limiting the usefulness of the illegal installation. Outside of an activation attempt, Microsoft does not know how many PCs Windows XP, Office XP family product, or Office 2003 System product have been installed on.
It's all right there.. they even refer you to read your EULA. It's all in there.
<A HREF="http://www.microsoft.com/piracy/activation_faq.mspx" target="_new">FAQs</A>