I had a somewhat similar problem.
My computer came pre-installed with XP Home. I got the key on side of computer too. Anyway I had to get a new hardrive but never got a cd to install XP Home.
Anyway, I asked my friends with pirated copies if they had XP Home install CD. They of course only had Proffesional. So I installed that and got a program to get rid of the Activate XP problem.
It worked fine untill I had 7 days left, a popup told me that I had 7 days left to activate XP. So I got another program that resets the activation at startup. It's been 7 days and comp is still running strong.
I would rather be legal but I don't have access to an XP Home install CD.
Now as for your problem,(sorry for long rant) whenever you boot your computer when it's not activated it should bring up the window to activate XP. I believe from there you can enter the key and it will contact Microsoft to validate it.
PS I hope just talking about the programs I used to "activate" XP is ok. I left out all specifics.