I have not looked at this method in-depth because I thought BartPE only creates restoration CD's.
Does it therefore run a 'live cd' version of XP without having to install the O/S?
Does it therefore run a 'live cd' version of XP without having to install the O/S?
Yes.
What are the legallities behind this?
No problem whatsoever, since you need it to feed your real XP disk first to generate the LiveCD media. It doesn't include any copyrighted microsoft files with the distribution itself. As long as you don't run it on a machine that you don't have a legal XP license for, there is no legal problem.