To comply with the license you need a OEM, Retail, or Upgrade (From an OEM/Retail/ or Upgrade (rinse and repeat)) version of XP or Vista that is not being used on Another System. The upgrade license should comply with the OEM or Retail license terms meaning if you upgrade from an OEM you are still tied to the motherboard that you used to build that computer with meaning no motherboard upgrades from an OEM copy only replacements using the same model board.
Installing an upgrade only requires that the disk be able to see a copy of Windows (XP, Vista, or even 7) on any one of the drives not necessarily the drive that it is being installed onto and you are allowed to use either upgrade or clean install options when installing Windows using an upgrade disk.
Given this the reason someone would want a Retail disk is to have a license that is NOT tied to the motherboard of their computer when they go to upgrade from one system to another. Basically if you buy retail when you sell of your parts you will be able to keep the OS for yourself legally. If you had an OEM copy that OS would legally be tied to the motherboard that you would be selling it would not be yours as it would belong to the hardware that it was first installed onto.