A handy Microsoft page explains the ins and outs of Multicore Processor Licensing. Short version: Windows is licensed on a per-processor basis, not a per-core basis. So, despite the fact that the operating system treats individual cores as if they were separate virtual CPUs, the license agreement does not:
The customer will incur the cost for one software license per processor, not per core. So if a customer replaces the single-core processor on their system with a multicore processor, they will need to have only one license per processor.
[…]
Microsoft Windows XP Professional and Microsoft Windows XP Home are … licensed per installation and not per processor. Windows XP Professional can support up to two processors regardless of the number of cores on the processor. Microsoft Windows XP Home supports one processor.
This also means that quad-core processors (due to hit shelves in November) will not cause any licensing problems. Nor, in fact, should the 80-core processors Intel says it will have within five years.
(Via Raymond Chen)
… And I almost forgot this article on Windows Vista’s support for 64-bit and dual-core CPUs.
Ed Bott 
But a dual-processor system will require 2 licences? Actually, now I’ve said that, does Windows take any advantage of dual-processor set-ups?
As the last line notes, XP (and Vista as well) are licensed on a per-installation basis, not a per-processor basis, so a dual-processor system requires only a single license of Windows XP Professional or Windows Server 2003. The second processor is completely unsupported in Windows XP Home Edition, so if you try to run XP Home on your dual-CPU system one CPU will go unusued. In Windows Vista, you’ll need to run Business, Enterprise, or Ultimate edition to take advantage of the second processor. Again, only one license required.
The best explanation I’ve heard so far was from a Microsoft MVP: Processor Licenses are by socket rather than core. That cleared up everything I needed to know.
So Windows Server is per processor and will require 2 licences in a dual-processor machine (regaurdless of the number of cores in each processor).
Windows for consumers (XP, Vista, etc) is per installation, where you could have as many processors as you want (with as many cores as they can fit on chip) and it’ll only require 1 licence, though support for the extra processors is as written in Ed’s comment.
The final question I have then is – 2 licences = 2 product keys? Does server set-up detect 2 processors and ask for 2 product keys? Or is it assumed that most places with this set up will use volume licensing?
Ben, AFAIK, all Windows Server editions are also licensed on a per-installation, not per-processor basis. If your version of Windows supports more than one CPU, then it will recognize the additional CPUs and use them if they are present, up to the limit in the software itself.
Some server apps are licensed on a per-processor basis, but I don’t have time to research that now.
Anyway, one license = one key.