The Microsoft XP license says expressly that it must be run on a physical
machine with a core processor and prohibits use in a VM. They changed this
is 2008 when Microsoft allowed its* server* editions to be installed on VMs.
So anything before 2008 is not allowed and anything since must be a server
edition for this purpose, ie. expensive. See:
www.microsoft.com/.../virtualization.aspx

Microsoft has had its own virtualisation but it has not been adopted so they
have resisted the efforts of VMware and others to loosen up. Some companies
have taken the position that it can be installed in a VM provided you keep
it there for 90 days and don't move or transfer it. Moving a Windows VM to
another machine is considered a transfer of license by Microsoft and it is
subject to their restrictions. This of course only applies to their server
products such as NT and not desktop products like XP.

We are technically in violation of the license if we use XP in a VM.
Everybody does it and it has not been tested before the courts. Going to
court with MS would bankrupt anybody but the largest companies. There are
lots of Windows licenses around. I personally have paid for several and
thrown them out over the years. Using them in VMs would be handy for those
needing Windows compatibility. It is not something we should advertise if we
do it. However, if you have an NT license then you are in luck. I don't.