The 'totally legit' activation key is for your computer and your OEM copy of WindowsXP. OEM software is licenced for the machine on which it's installed, and you can't use another activation key. Borrowing your mate's copy of Windows XP is illegal, so don't do it.
All the Windows files will be on a hidden partition on your hard drive, and you can do a restor from there. This will return the machine to its factory configurations, so make sure you back up any important data files, and that you have the drivers for any hardware items that you've added since you bought the computer.
When the computer is booting do you have the option to enter the machine into recovery mode? Some manufacturers offer this option instead of a recovery CD.