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So I have to ask: what's preventing anyone from setting up a home SUS/WUS server (redundant, I know) and just using that to update their local/pirated XP/2k machines? Or are they just relying on the fact that most people have no idea you can do this?

Probably nothing. The validation prog is only really to stop casual piracy and make it clear to end users if they've got a bad copy. If you were really determined then you can get around it. Chances are that people will just stop doing the updates.