How to Setup Windows XP from USB drive?

Step1: Prepping BartPE:
First we’ll prep the USB drive we’ll be using for booting. This is by far the largest step in the process, though it shouldn’t be difficult for anyone to follow. It requires a functional Windows system.
  1. Download BartPE builder from http://www.nu2.nu/pebuilder/
  2. Install BartPE. We’ll be assuming that you install to C:\pebuilder.
  3. Start PE Builder from the Start Menu. Point "Source:" to the location of your Windows XP setup files containing SP3.
  4. Make sure the "Output:" is set to "BartPE". 
  5. Set "Media output" as "Create ISO image" and filename as "c:\pebuilder\pebuilder.iso".
  6. Hit "Build". 
  7. When it's done building, image file "c:\pebuilder\pebuilder.iso" should be created properly.
Step2: Create XP Bootable USB Drive:

  1. Start PowerISO (v4.8 or newer version, download here).
  2. Insert the USB drive you intend to boot from.
  3. Choose the menu "Tools > Create Bootable USB Drive". The "Create Bootable USB Drive" dialog will popup. If you are using Windows Vista or Windows 7 operating system, you need confirm the UAC dialog to continue.
  4. In "Create Bootable USB Drive" dialog, click "..." button to open the iso file "c:\pebuilder\pebuilder.iso".
  5. Select the correct USB drive from the "Destination USB Drive" list if multiple USB drives are connected to the computer.
  6. Choose the proper writing method. "USB-HDD" is recommended.
  7. Click "Start" button to start creating bootable USB drive.
  8. When it's done, copy the Windows XP setup files to the USB drive. Please note that you'll only need the i386 folder. 
If no errors occurred in the above process, you should now be all set to setup Windows xp from USB drive!
Step 3: Configuring the BIOS:
You should now reboot and go into the BIOS configuration to boot from USB. Instructions for doing so wildly from system to system, but generally entail the following:
  1. Reboot the system.
  2. While booting (before Windows starts loading), get into the BIOS configuration screen by hitting something like F1, F2, Delete or Escape. Hotkey instructions are generally provided on the screen.
  3. Go to the section that contains your boot devices.
  4. With your USB drive plugged in, the USB drive should be listed. If it isn’t, your system might not support booting from USB. Assuming that it is supported (as is the case with virtually all modern hardware), promote your USB drive to the primary boot device.
  5. Exit from the BIOS configuration, saving all changes.
If you’re completely new to BIOS configuration, BIOS for Beginners over at Tom’s Hardware might be a good primer. Be aware though, that you can seriously screw up your system by providing incorrect settings!
Step 4: Booting into BartPE:
Assuming that you properly configured your BIOS and your USB drive supports booting,  BartPE should now load. Depending on the speed of your USB drive, this may take a while.
If it isn’t working, then double-check the following before making a scene:
  • Is your BIOS properly configured for booting from the USB device? (Is the USB device listed and does it have top priority?)
  • Have you correctly prepared the USB drive in step one? (Restart the procedure.)
  • Does your USB drive properly support being booted from? (Try another one!)
 
Step 5: Prepping the Hard Disk:
You need to make sure that your hard drive is partitioned and formatted properly. Especially if you've had Linux or some other operating system on it, you'll need to repartition and format it. BartPE contains DiskPart for disk partitioning and A43 File Manager to format your drive.
If you are sure that your hard drive is set up properly (i.e. it has only run Windows, it contains a valid FAT or NTFS partition) then you can safe yourself the hassle and skip this step.
To repartition (This procedure will destroy any data on the hard drive):
  1. From the Go menu, navigate to DiskPart.
  2. Enter the commands needed to repartition your drive. For example, try the following: select disk 0 (select the first disk), clean (purges the entire drive, essentially resetting it), create partition primary (creates a single partition from the entire disk), assign (assign the partition a drive letter), exit (quits DiskPart).
To format (This procedure will destroy any data on the hard drive):
  1. From the Go menu, navigate to the A43 File Manager.
  2. Right-click on the target drive (e.g. C:) and click Format. Should be self-explanatory.
Step 6: Launching Windows XP Setup from USB drive:
With your drive all ready, you can now launch the Windows XP setup with a few custom parameters. Let's assume that the files are available at X:\i386.
Plugging in a device now won’t work. Remember that all USB devices will need to be plugged in right from the start while using BartPE.
Run the following command:
  1. Run X:\i386\winnt32.exe /syspart:C: /tempdrive:C: /makelocalsource. Replace C: with the drive you want to install Windows to.
  2. Proceed with the installation. When asked to convert the installation volume to NTFS, answer No. The setup program incorrectly believes that your USB drive (which is formatted as FAT) needs conversion.
The setup program will then silently close, which might make you think that something went wrong. Don't worry though.
Step 7: Continue Windows XP Setup from Hard disk:
  1. Reboot your system.
  2. Unplug USB drive during post stage.
  3. Change your BIOS settings back to boot from hard disk again as needed.
  4. You can now continue to finish setting up Windows XP.