That is to run the CD installation on a computer that cannot boot from a CD.
Restoring to factory settings will return the computer to the same state as it was when it came from the factory. It's necessary for the hard drive to still contain the recovery partition for this to work.
If you can find any way to borrow an OEM Windows XP CD, it is perfectly acceptable to use it with the product key belonging to your computer to re-install. Preferably it should be XP SP3, otherwise there is a long manual downloading and installing of service packs involved.
Edit: cross posted!
Edited by Platypus, 04 September 2015 - 10:41 AM.