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The embarrassing revelation prompted Microsoft to admit that the anti-theft features incorporated into XP were designed to prevent casual copying rather than wholesale piracy.
The company made the admission in the wake of reports that crackers used their expertise to bypass the product registration process for the software, and posted the necessary patch on the Internet.
Product activation was designed by Microsoft to prevent a single unit of Windows XP being used on multiple machines. It requires the user to type in a special code to activate the software, which then meant it could only be used on that machine.
John Safa, chief technology officer at software development company BitArts Labs, said copies of Windows XP - with the protection mechanism stripped out - are available for as little as £5 each.
"Someone has cracked the files and repackaged them, so what you do then is copy your Windows XP installation to your PC, copy the patched set-up files to your PC, and run the set-up. No licence activation is needed," said Safa. "What's more,", he added. "The CD key that is normally unique to each copy is no longer unique."
Microsoft's licensing manager, Duncan Reid, denied that the product activation mechanism itself had been cracked, but acknowledged that the company continued to face problems from hardcore software pirates.
"We are aware of a number of so-called cracks which have appeared on the Internet, and in the main these have been deliberate misuses of leaked volume licence product keys and media," said Reid. "This is not casual copying but deliberate piracy."
Volume licence product keys allowed Microsoft's corporate customers to install Windows XP on to hundreds of machines without having to register each user individually.
"It is widely acknowledged now that piracy is not a Microsoft problem - it is an industry problem," added Reid.
"We have a number of anti-piracy methods and techniques, such as end-to-end holograms within the CDs. There is a whole host of measures that we put in place to ensure that when customers buy a product they are safe in the knowledge that it is a bona fide Microsoft product."
Safa suggested Microsoft needed to do more to beat the crackers. "Microsoft needs to look at the techniques used by crackers and play them at their own game," he said. "If they listen to people and understand how it is done, it is possible to stop it."
Reid hinted that Microsoft might become more receptive to outside help in combating counterfeiters.