Well - I have run my test and despite my best efforts, its just not do-able with XP.
The problem comes down to the fact that the 'profile path' (c:\Documents and Settings) contains a space (actaully two) in the path name and that derails MySQL - it just won't start (one of the reasons they tell you to install XAMPP in the root of a volume). The hack involved using a little known feature of XP called 'Private Folders' - it turns out they can ONLY exist in the 'profile path'.
Sorry about that. (blame Bill Gates, the MySQL developers, or whomever you choose)