What are the downsides to buying the OEM version of an operating system?

Microsoft do allow consumers to install OEM versions on machine they built themselves so legally you should be OK.
The OEM versions are either 64bit or 32bit (the retail key will activate either but OEM will only activate one version so you have to choose what you want when you buy it).
With OEM versions you do not get any free support from Microsoft personnel via telephone or email (retail gets you 90 days of email and telephone support – so no big loss).
OEM licenses are tied to the very first computer you install and activate it on (while retail versions can be moved as you like as long as its not on two machines at the same time). You can change any hardware except for the motherboard. If you do change the motherboard and reinstall windows it won’t activate and you will have to call MS directly to get an activation code. They have said that they will reset the activation it say if a motherboard fails but probably not more than once.

Given that MS are currently selling windows 8 for $40 it might be worth considering that. OK you have to install 7(orXP) on the drive first but you don’t need to activate it before installing 8. Stardock’s Start8 for $5 brings back the start menu quite nicely (I’ve been using 8 for a week now and only seen the new style interface once). After that it’s pretty similar to 7 and probably worth at least considering.

Outstanding answer. Thanks, @Lightlyseared. I will definitely not rule out Win 8.

@Lightlyseared Second question in a row where you have beaten me to the punch :p

However, I would like to thank you for bringing Start8 to my attention, as that may make Win8 a worthwhile choice. While there are technical reasons for me to like Win8 over Win7, there are enough UI reasons for me to rather stick with Win7 or follow Steam and go to Linux.

And then there are the zillion updates and patches that you will have to install. (I just re-built the wife units laptop with rebuild disks and she had north of 140 of them) On the positive side, if there are proprietary drivers and/or good bloatware that originally came with the computer in question, you get those back, fleas and all.
For now, I fear Win8. I usually wait til sp1 before I will make the move. When this unit dies, I may dip my piggies in Ubuntu just to keep things interesting. You guys will probably be astonished to find I have never played with Linux. Yet.

@jerv start8 is pretty good. You can disable all the metro stuff and boot straight to the desktop and have access to all the usual stuff. There’s no drag and drop to rearrange stuff but other than that its fine. While I was playing with the RTM version I used the task scheduler to boot direct to the desktop and as long as you had all the programs you used regularly pinned to the task bar it worked OK. Also since I updated my motherboard it boots up remarkably fast (less than 10 seconds from off to desktop).

@Lightlyseared As someone who commonly uses enough programs that the quick-launch icons on the left of my task bar almost meet the control/status ones on the right, that miht be a slight issue. Still, I like the idea of faster boots without the expense of an SSD of usable size.

Win 8 and Start8 sound like a good choice for me. I’d love to be able to go to Ubuntu or another distro of Linux, but GIMP just doesn’t compete for image editing. As a web developer, I have to have top-flight image processing capabilities.