If you use Microsoft's Open, Select, or Enterprise volume-licensing agreement to purchase Windows XP, you needn't worry about Windows Product Activation (WPA). The product key that those licenses provide bypasses the activation process. (For information about Microsoft's volume-licensing agreements, go to http://www.microsoft.com/business/licensing.) Additionally, copies of XP that come preloaded on an OEM system are preactivated and won't prompt you to reactivate the OS upon initial startup. (However, if you make more than four hardware changes to the system, the system will prompt you to reactivate.) But if you're installing a retail version of XP, plan on encountering WPA, which prompts you to activate and optionally register the system at the end of the installation process.
To automatically activate a copy of XP, you must have Internet connectivity. The activation process sends a unique system-identification code to Microsoft across the Internet, and Microsoft returns a code that activates the OS. XP uses data about your system's hardware—as well as a Product Activation Key that you enter as part of the installation process—to generate this 50-digit code. If you don't have an Internet connection, you can call the Microsoft support number, which the Windows Product Activation Wizard provides, to complete the activation process. Microsoft gives you a 30-day grace period in which to complete the process, after which XP immediately returns to the Welcome screen and prompts you to complete the process.
Although Microsoft hasn't divulged WPA's full details, the company insists that activation transmits no personal information to Microsoft. A third-party software-development firm has reverse-engineered the WPA process and has published a white paper that explains the process in detail. For more information, see http://www.licenturion.com/xp.