hello Alan...
You could try to create a Virtual PC VHD , install Windows XP there, and after the first part of installation (the blue screens),upon the first restart, stop the Virtual PC and use this VHD to boot with. It should probably continue to load Windows XP and install them on the VHD...probably.
Only thing is that you should change some BCD entries to boot totally from the VHD:
Copy your VHD file you have created from a Virtual PC and have started installing XP, which you stopped before it got to the second part of the installation, to C:\winxp.vhd
open an elevated command prompt and type:
bcdedit /create {ntldr} /d "My winxp VHD"
bcdedit /set {ntldr} device vhd=[C:]\winxp.vhd
bcdedit /set {ntldr} path \ntldr
bcdedit /displayorder {ntldr} /addlast
This could probably boot XP from VHD. Please post back results.
EDIT: I tried everything...It seems Windows 7 is using its own hardware abstraction layer to boot from VHD, so I believe you cannot boot XP...probably not even Vista...Windows 7 only..