Ever since the Internet really took off and file sharing became popular, Microsoft has added an extra layer of security to its products in an attempt to reduce piracy. Since the release of Windows XP, the Windows Genuine Advantage program has restricted some updates and patches for unregistered copies of Windows. This is an attempt to dissuade people from using copied software. Essential security updates are made available to all, but none of the enhancements and bug fixes are released to unregistered copies.
If you have a genuine copy of Windows with an intact key, validating Windows takes moments. It can either be done during install for XP, or during install or later in Vista or Windows 7.
In Windows XP you have to enter your CD key during installation.
Once the key is input, setup continues. It is easier to allow Windows to activate automatically, as well as download updates the same way. It takes the hassle out of keeping your system up to date.
You should see this dialog box during the setup process. Enter your product key here and set Windows to update automatically when prompted.

click to enlarge