If there were legal issues in relation to distributing the full XP Embedded OS, the author could always just distribute the Target Designer project file and simply include download and build instructions to make it easier for end users to set up. It shouldn't take anymore than a few minutes to generate the OS image build and has the added benefit of letting the end user add some optional components they may wish to use....
XPe should also work fine in an emulator like QEMU if you want to try, though its just not the same...

Oh, and Pocket PCs are built on "Windows CE", not XP.
Also, there is no such thing as "Windows CE Embedded." Its always embedded anyway because its designed as an Embedded OS.