Well, you could use BartPE:
http://nu2.nu/pebuilder to create a bootable CD that is meant for recovery and troubleshooting use. However, with a bit of tweaking, I'm sure you could simulate a full-fledged Windows XP, with the one caveat that you will have to save all files to an external hard drive.
You could also use a Live CD of a Linux Distro, i.e. Ubuntu.
I had an external hard drive, I opened it, and I discovered it was merely an enclosure with a SATA drive inside. If your drive is out of warranty, you might want to do so.