Another alternative might be to boot Windows PE 2.1 from the HDD into RAM. This would require downloading MS's Windows Automated Installation Kit for Vist SP1 and Server 2008. The downloaded image would need to be mounted in a virtual CD/DVD drive in order to install the WAIK.
When WinPE is booted into RAM, it may be possibe to install XP from a USB Flash Drive using
wimb's U_XP_SET, provided that all the required installation files are available on the HDD (or another UFD?).
To boot WinPE 2.1 into RAM, it would be necessary to set up Vista's BOOTMGR, which can be used to dual-boot XP and Win PE 2.1. That might be the catch - setting up BOOTMGR on the HDD by using bcdedit and bootsect from an OS which is currently running on the HDD, i.e. your XP. From memory, bootsect states an error, but I'm not sure whether it actually fails or not.
To set up BOOTMGR, it would be normal practice to firstly boot WinPE 2.1 from an optical drive or external device. However, in that case, it wouldn't be necessary at all to boot WinPE 2.1 from the HDD - just stick to the external device.
Do you think you can boot from the USB stick? How much space on the HDD? How much RAM?
Just thought I'd throw in an alternative idea.
Regards