Quoting primesuspect

Jonsey, that conflicts directly with my experience. I re-activated my XP license after upgrading it to Vista. I called Microsoft, explained my situation, they gave me a new activation key, and it passed Windows Genuine Advantage validation.

Is it still technically an "illegal" license now?

It can't be illegal. What if you need to reinstall Vista onto your new drive after the old one dies or whatever the circumstance? Then you need to use the valid XP all over again to repeat the process.
I think it would be illegal to run that particular XP on another system after you've used it to activate Vista. That's my interpretation.