ktp, sorry to say so, but, notwithstanding the great troubleshooting work you did with
tinybit 
, you are NOT an inch closer to actually booting XP from a hd image than you were before.
With the exception of VERY rare cases of "black magic" as I like to define them or "voodo" as Peter (
psc calls them, all computer related problems are usually (read always) caused by something.
The generation of an error can be traced using logic.
There is NO WAY, and I mean NO WAY to boot XP from a disk image, you will always get a 0x000007b boot error.
This has nothing to do with grub4dos, please follow me:
1) grub4dos main utility is the ability to
chainload something else
2) once it has chainloaded this something, it rather obviously has not anymore ANY control on the following actions performed by the something that was chainloaded
3) in the case of "DOS", or "real mode" if you prefer, the IO.SYS, however invoked, trusts the info passed to it by the BIOS (and eventually modified by grub4dos) and "acts" accordingly
4) In the case of NTLDR or SETUPLDR.BIN, after an initial phase, in "real mode", during which info from the BIOS (and eventually modified by grub4dos) is trusted, it switches to "protected mode" and re-scans the system, loading the APPROPRIATE driver for the boot media.
5) during this re-scan, PHYSICAL devices are detected NOT "virtual" ones, the grub4dos re-mapping of a virtual disk image ONLY works until this re-scan has been completed, and since there is NO WAY to tell NTLDR or SETUPLDR.BIN that it needs to load the driver for this "virtual" device, you get 0x07b BSOD
6) there is an exception, which is the RAMDISK.SYS driver that has provisions (Server 2003 SP1+) embedded in the NTLDR and SETUPLDR.BIN
So, to make a NT based system boot from a RAW image we need:
EITHER:
a. a new NTLDR/SETUPLDR.BIN that has embedded provisions to do so AND a NT kernel driver capable of accessing/loading the image
OR:
b. a NT Kernel driver capable of accessing/loading the image that could somehow (by being renamed to RAMDISK.SYS) take advantage of the provisions already embedded in the 2003 SP1+ NTLDR/SETUPLDR.BIN
It is several months that I try to find such a driver, or a capable programmer (it is not an easy task to write a NT kernel driver) interested in writing one, to no avail.

Check these:
http://www.boot-land.net/forums/index.php?...ic=1441&hl=http://www.boot-land.net/forums/index.php?...ic=1507&hl=http://www.911cd.net/forums//index.php?sho...c=19960&hl= jaclaz