A3 Iv read about pod xt i think n they can be plugged into a usb port directly for recording and adding effects and stuff like that, im guessing all the software will come with the product and that it will be compatible with win xp as long as it has usb.
theres another thread somewhere that says something about a peice of equipment that does the same thing using firewire.
Alternativly you could use a eight track or 4 track and record through the line in on your pc the quality of sound will depend on your soundcard. Or you could record onto a minidisc.
All recording can be done on pc and edited
A1 i dont think you will need you win xp code other than to install win xp if you need to install winxp there are places where u can get serial numbers lol you shouldnt have to type a windows serial number into anything that isnt windows.
A2 mp3 files are good, they are versitile they can be edited and more importantly are the most common music fille format so shouldnt be a problem for anyone to lisen to stick with mp3.
A4 I thinks a pod is your best bet