If you choose to do this, it has to be at your own risk because I can't see the system.
However, no changes are made until the very last step so you can stop any time or not apply the last step and nothing will be changed.
Many years ago I actually spent a lot of time with data recovery and partition recovery. I only stopped when more robust backup and imaging programs came along but back in the days of early NTFS and FAT32 it was rather common for people to loose entire partitions.
Thats what I think may have happened here, the way you describe what happened and windows saying it needs to be formatted and it's the wrong size sure sounds like you lost or corrupted the partition table and\or MBR.
This is what I would try because if this is what happened, all that needs to be done is to replace the 2 partition boundries exactly where they were before and all your data may just "reappear".
I have suggested this to 4 people here but I can't seem to find 2 of the posts, I can only find this one:
http://community.norton.com/t5/Other-Norton-Products/Help-Accidentally-deleted-partition-on-Media-Drive/m-p/670821/highlight/true#M45134
But I'll try to copy it all here because your situation is a little different than that other post.
You will need to have the bad drive installed in the laptop it came from, for best results don't try this over USB,
On your working system go here and download the free bootable CD for partition wizzard home edition.
http://www.partitionwizard.com/download.html
Burn that ISO to a CD and boot the laptop with the bad drive in it.
When you boot the system it will look like this:
When I made these screen shots I had 2 drives attached, your only going to have one.
Try to make a note of what it looks like. It may show all unallocated, one small "phantom" partition and the rest unallocated, etc.
Then like I show above, click Wizzard > Partition Recovery Wizzard
Then you get a screen like this:
You only have one drive, so select the only drive showing.
Next screen I don't have a picture of but it asks if you want to do a quick scan or full scan, quick scan should be fine.
Then you get tis screen:
The screen above is the important one.
When I made this I simply deleted my partition so it only shows one possible configuration because I only had the partition boundries set in one position since the drive was first partitioned.
You may see at least 2 different configurations, maybe more.
DO NOT check any boxes on the left at this time.
Repeat, DO not check any boxes yet.
For XP, the starting LBA is usually 63 because XP creates cylinder aligned partitions.
What I don't know is how many partitions the drive had before. It's very common for preinstalled systems to have multiple partitions. It usually never has one partition unless the user installed XP themselves.
Look for a line that has 63 under the "starting LBA" and wihout checking the box, double click the line
Just like where my cursor is pointing at the line, double click it.
You then get a screen like this:
When you double click on a line, your "viewing" the partition "through" that suggested configuration.
You have not made any changes yet but your using those partition boundies to "see" the partition.
In my screen shot above, everything looks good so I know it is correct.
If it was incorect, it would apprear empty, or look like "gibberish" or unreadable like it's the wrong language.
If it is not correct, close the screen and pick another line to try.
IF and only if you find a line that everything looks good, you may chek the box on the left and click finish.
If your unsure about anything then just click cancel.
Best of luck
Dave