There are several possibilities.
1. The XP CD is bootable, and be able to run the "recovery console".
Alternatively, the recovery console is obtainable as a multi-floppy disk
image set from Microsoft, who calls it "setup disks". The recovery console
supports a few DOS-like commands and things disk checks and partitioning.
Note that the recovery console may ask for a password, meaning the password
for the original PC administrator, not necessarily the first user defined
under XP. That is often blank. See links below:
http://www.kellys-korner-xp.com/win_xp_rec.htm
http://www.wown.com/j_helmig/wxprcons.htm
http://www.xxcopy.com/xxcopy33.htm (near bottom)
http://www.webtree.ca/windowsxp/repair_xp.htm (about number 26 in list)
2. If your XP CD is retail (even if upgrade), it can be used to perform a
"repair" installation of XP. This will "refresh the system files, but will
not erase installed programs or personal data. However, it will also not
fix most problems with the XP registry. A repair will remove all XP updates
newer than the date of the CD, and then you will need to re-run windows
update, once XP is back working OK. See links below:
http://support.microsoft.com/default.aspx?scid=kb;en-us;315341
http://www.webtree.ca/windowsxp/repair_xp.htm
http://www.extremetech.com/print_article/0,3998,a=23979,00.asp
http://www.geekstogo.com/forum/Repair-Windows-XP-t138.html
3. As you are probably aware, you could perform a "clean install" using the
XP upgrade CD. However, it will want to see a "proof" of ownership of some
earlier windows than qualifies for the upgrade, such as 98, 98SE, ME, 2000.
For that you must have a CD from one of those, unless they are already
installed on the hard drive. But, a clean install is probably the last
resort, since it will erase all user data and all installed programs on the
partition onto which you re-install XP. This is a good reason to keep
personal data on a separate partition. But, that would not help for
programs, since even if they were installed on a separate partition, some
pieces of them are always installed on C:.
4. The are many bootable CDs that can fix specific problems.
4a. The Ultimate boot CD is pretty good for hardware problems, but
DOS-like. It is free.
http://ubcd.sourceforge.net/
4b. KNOPPIX is a CD (or DVD) that runs LINUX and can read/write NTFS
partitions. It can rescue data form an XP system to a ZIP or to a USB
drive. It can also be used to fix a few small things, like manually editing
BOOT.INI. KNOPPIX is free, and even the CD version contains a full office
suite, web browser, etc. It could be used instead of XP. It configure
itself to the hardware, and does a better job in that respect than XP (e.g.,
knows about SATA hard drives).
http://www.knopper.net/knoppix/index-en.html
http://www.knoppix.net/wiki/Main_Page
4c. Bart's PE is a bootable CD that you make that runs a portion of XP, so
it looks and feels like XP. It is can do a lot more than the recovery
console, and does not ask questions about passwords. Bart's is free, but
you have to do follow a page or so of instructions to make it work.
http://www.nu2.nu/pebuilder/
Note on CD-images of rescue operating systems: "ISO" files can not be
dragged&dropped onto CDs, not is you want them to function. They must be
written with something like Nero or Easy CD Creator using an option like
"burn from image".
5. The other option is to make disk images or partition images. If the
physical hard drive dies, then no rescue CD will help. I have had good luck
with Acronis True Image (version 8), and also Norton GHOST (version 2003).
One note on images: disk images usually contain the master boot record, but
partition images do not. But, in theory you can use FDISK or the XP
recovery console to write a master boot record, make partitions, etc. Then,
as a separate operation, use the imaging program to perform a restore. I do
this because I have several partitions, and do not wish to backup all of
them all the time. However, if you have one big C:\ drive, then a disk
image would be more convenient. All modern imaging programs perform
compression and many also only backup files, not free space (except by
special request).