It is still possible. I have seen CD rom drives fail and cause a yellow exclamation point or "CD ROM DRIVE IS NOT ACCESSABLE" error in win98. The first is very rare, but I have seen it. I admit to not being well versed in XP. But I think you are all on the right track about using the Install disk. I Imagine that DEll would have some kind of warning message before it started writing to the hard drive. They have to assume that someone is going try the CD even if they have no reason to.
yes, a selection screen pops up and gives you some options before it does anything.