OEM stands for "original equipment manufacturer" and OEM software is a phrase that refers to software that is sold to computer builders and hardware manufacturers (OEMs) in large quantities, for the purpose of bundling with computer hardware. The third-party software that comes with your digital camera, graphics tablet, printer or scanner is an example of OEM software.
In many cases, this bundled software is an older version of a program that is also sold on its own as a stand alone product. Sometimes it is a feature-limited version of the retail software, often dubbed as a "special edition" (SE) or "limited edition" (LE). The purpose is to give users of the new product software to work with out of the box, but also to tempt them to purchase the current or fully-functional version of the software.
OEM software may also be an unlimited, fully-functional version of the product that can be purchased at a discount with a new computer because the system builder sells in large quantities and passes the savings on to the buyer. There is often special license restrictions attached to OEM software which attempts to restrict the way it is allowed to be sold. For example, the end-user license agreement (EULA) for fully functional OEM software may state that it is not allowed to be sold without the accompanying hardware. There is still much debate as to whether software publishers have the right to enforce these license terms.
There is also a lot of confusion about the legality of OEM software because many unethical online sellers have taken advantage of consumers by offering drastically discounted software under the "OEM" label, when it was never authorized by the publisher to be sold as such. Although there are many instances where it is perfectly legal to purchase OEM software, the phrase has often been used to trick consumers into buying counterfeit software. In these cases, the software was never published under an OEM license, and the seller is offering pirated software which may not even be functional, if you are lucky enough to receive it.