1. Making bootable iso doesn't change that Windows it only prepares the ISO so that you may boot and install from it without initiating installation from already existing windows, isn't it better to boot and format? Also I recommend booting from it, winnt*.exe methods are somewhat buggier when it comes to modified windows. 2. To be exact extracted sp selection path is stated in nLite when you click Insert, it's .\update\update.exe