On the page http://eeetutorials.blogspot.com/2007/11/i...-usb-thumb.html there is a script called usb_prep8, this is what copies the i386 folder from the cdrom. I didn't create this script I found it on an older msdn post. There didn't seem to be a complete tutorial for installing XP using a single USB stick so I spent a couple days piecing things together. What I've heard back from people who have used this method is that it works for retail copies of XP with SP2 but nlite installations fail, this may be due to people removing winnt.exe by mistake or because the script fails when expected files are missing from i386, I've been too busy to check it out myself. The script is basically a collection of batch files, if you wanted to take a look you could probably figure it out much faster than I could . I will take a look myself tomorrow and give you some exact error messages.
