^ who told you that it's not legal ? It is as far you are using the same os on a single computer....It's in the EULA.....btw on your topic...it's possible to create a Live CD of Windows XP....its through the use of BART PE process....this can be used but it's very old though and the support no longer exists...head over to *nu2.nu/pebuilder/
You can read the tutorial in the site itself..if you could'nt understand the process then PM me...