License states are been used by Windows Vista to track activation. The five license states that are used by Windows Vista are Licensed, Initial Grace (OOB), Non-Genuine Grace, Out-of-Tolerance Grace, and Unlicensed.
Licensed Windows Vista State
A “Licensed” computer is a Windows Vista PC that has been properly activated. Activation can happen in several ways including Internet and phone activation. Additionally, KMS clients can activate themselves after contacting an activated KMS.
Initial Grace Windows Vista State
Initial Grace (or OOB Grace) starts the first time you start your computer after you install the operating system, and has a duration of 30 days. You can activate Windows Vista computer anytime during the 30 days. The Initial Grace period can be restarted by running sysprep /generalize, or by using slmgr.vbs –rearm. Once restart, these processes reset the Initial Grace timer to 30 days, but the reset will only work three times.
Non-Genuine Grace Windows Vista State
Non-Genuine Grace occurs only on a computer that has the Windows Genuine ActiveX control installed, and then fails Genuine Validation. The computer is marked non-Genuine, and the License State may be changed to non-Genuine Grace. If this happens, non-Genuine Grace provides 30 days for the computer to be re-activated and validated Genuine by re-visiting the WGA website at http://www.microsoft.com/genuine.
Out-of-Tolerance Grace Windows Vista State
Out of Tolerance Grace begins when cumulative hardware changes on an activated computer push it beyond a tolerance level, or when a KMS client goes for 180 days without contacting a KMS. OOT Grace provides 30 days for a computer to be re-activated. A computer may be activated and then fall into OOT grace any number of times, and each time the OOT Grace timer will be reset to 30 days.
“Unlicensed” Windows Vista State
If you don’t activate Windows Vista within grace period, or when any grace period is allowed to expire, the computer becomes Unlicensed. An Unlicensed computer runs in Reduced Functionality Mode or RFM (check out license protection mechanism in Vista for more details on RFM), where users has very limited access to the system in one-hour increments, and presents a window containing links to properly license and activate the computer. If the computer falls into RFM from non-Genuine Grace, the user is presented with a window containing links and solutions specific to recovery from non-Genuine RFM.
Source (link dead)