The OEM license is (a) only valid if sold bundled with a new PC, and (b) it can NOT be transferred to another PC, or in Microsoft’s own words – ‘the software lives and dies with the PC’. Incidentally, some OEM versions (though not all) are manufacturer-specific, i.e. BIOS-locked so that they can only be used with Dell or HP PCs etc, but when this is the case it is clearly identified on the package.
The Retail (or FPP for Fully Packaged Product) license can be purchased at any time and used with any PC, and can be transferred from one PC to another.
Retail software is nicely boxed as opposed to the OEM which is usually provided in plastic shrink, but it no longer has the advantage of a printed manual as used to be the case in the past. The other difference is that Retail software is supported directly by Microsoft, where as OEM software is supported by the vendor who sold you the PC. If you contact Microsoft Support with regards to any software who’s Product ID shows it’s an OEM version, they will simply not talk to you.
There is a third option which is through Microsoft’s various licensing schemes e.g. Open Business Licensing, Open Volume Licensing, Microsoft select, Microsoft Action Pack, Microsoft MSDN, Academic licenses etc…. but this are generally not applicable for home users.
The only exception is Microsoft Student and Teacher editions, which are very very cheap – if you are eligible for one.
As for OEM, in principal it can only be purchased by ‘system builders’ for the purpose of pre-installing and bundling with a new PC – but Microsoft have acknowledged a loophole where home-builders can purchase OEM versions legally if building their own PCs since they qualify as ‘system builders’. In fact, if this was not the case, then legally building your own PC would have been prohibitive as the OS license alone would have cost around £100 more.
It is also important to emphasise that these are all legal issues, not technical ones – in practice you can install any CD on your PC, be it OEM, Retail etc (as long as you have the correct Key Code that is), and it will work fine, but if you want the license to be legally valid you need to follow the guidelines as detailed above….