Here's my problem

I make a copy of my xp cd, integrate sp2 into it using nLite and make an iso.

That ISO gets installed in a virtual PC just fine

When i try to integrate hotfixes, it no longer works, and produces an error. I can't read it, but it says something about virtual memory. I integrated the hotfixes manully using /integrate. Some didn't work, but i just ignored those.

What could the problem be?

If I understand you correctly, you integrate SP2 and nLite your source and after that you integrate the hotfixes? If so, you should integrate the hotfixes prior to running nLite or integrate the hotfixes using nLite. Also, perhaps you integrated hotfixes which are not meant for your source. Without knowing which hotfixes your exactly applied, it's hard to say.

I couldn't get the hotfixes to integrate with nLite, i was getting the exact same error. I'll post a list of files i am trying to integrate later tonight.

Then you're most likely importing the wrong files or your source is corrupt. Re-copy your source from your original installation disc and try again.