Update: Looking for Windows 7 Live CD ?
To create a Windows XP Live CD we will require
1. Bart PEbuilder
2. A CD burner like Nero
3. A bootable Windows XP CD and
4. Some pebuilder plugins to customize the CD.
Step 1 : Download PeBuilder from here and install it. Make sure you have enough free space on the drive where you install the program. After you have finished adding all programs it will create an ISO to be burned intoa disk. The size of the ISO will depend upon how many programs you add to your live CD. I would recommend atleast 700MB of free space.
Step 2 : You may want to set a wallpaper that will appear on the desktop when you bootthe CD. For this open the folder where you have installed PEbuilder and replace the file bartpe.bmp with the wallpaper of your choice.
Step 3 : Download XPE plugin from here (direct download link). It's the GUI shell of the XP Live CD that will create the XP start button and taskbar. You are free todownload as many plugin (applications) you want. Currently there are more than 500 applications to choose from. Both freewares and commercial applications are available. Antivirus programs like Kaspersky, NOD32, Avast; burning program Nero; media players like VLC; OpenOffice, Foxit PDF reader, Acrobat Reader etc are available.
Pebuilder plugins repository
More Plugins here
Step 4 : After you have finished downloading all your favourite programs, open PEbuider and specify thesource path to the Windows XP installation bootable CD. You can copy the CD to your hard disk and point the source to the copied file.
Step 5 : Click Plugins andadd all the plugins you have downloaded. Since we have added XPE, disable nu2shell and the startup group from the list of plugins.
Step 6 : Specify the ISO image file and click Build.The program will integrate the plugins and create an ISO image.
Step7 : Burn the image into a disk using any burning software and your live CD is ready.

Source: Digit magazine Nov 2007 issue.