Windows XP mode is like a virtual image that allows you to run Windows XP (applications) on Windows 7. It comes with an activation key, in the file key.txt in XP Mode installation folder (C:\Program Files\Windows XP Mode\KEY.txt). It will activate your Windows XP virtual image in Virtual PC or in VMWare player, but it will not work with Virtual Box.

The activation feature itself is not totally broken, it is just that the key supplied is not recognized as a valid one. I don’t know what makes up a valid activation key, but there an easy workaround that might work for you.

Use the activation key of an old computer.

That’s it. No need for any Virtual Box plug-ins and what not. Any activation key that is on any computer that still have their Windows XP sticker, but don’t need it anymore. Maybe you installed Linux on that old desktop that was getting a little slow ? I used the license that came with had a Dell D430 on which I installed my Partner license for demonstration purposes.

From my experience, it looks like Windows XP is less fussy about Windows SKU numbers than Windows 7 is. YMMV.