I am trying to install Windows XP SP3 on a pre-formated partition in VirtualPC. It appears Windows can't boot from it if its allocation unit is greater than 4096.

The text-mode part of the installation proceeds fine - no errors or anything. Windows copies files to the disk just fine but when it reboots it always comes up with the error "A DISK READ ERROR OCCURRED. Press ctr + alt + del to restart". If you then boot up BartPE you can see the files are all there.

This is how I setup my 10GB virtual disk:

• 1. Boot up BartPE.
  2. Use MBRWizard to wipe MBR and the first head (sectors 0-63 I think)
  3. Use Diskpart to perform CLEAN command
  4. Use Diskpar -s to create a primary partition of 8000MB at 128-sectors offset (64KB)
  5. Use Diskpart to create an extended logical partition on the remaining free space
  6. Use Diskpart to assign letter C: to the primary (8GB) and letter D: to the logical (~2GB) partition.
  7. format c: /fs:ntfs /a:8192
  8. format d: /fs:ntfs /a:32K
  9. chkdsk c: and chkdsk d: to see allocation unit size and to make sure both partitions have no errors.
  10. Reboot
  11. Boot Windows XP install CD
  

I tried using allocation unit size of 4096 (default) for C: and 32K for D: with the exact the same procedure as described above and no error came up. Any idea why using 8192 cluster size doesn't work?

xp1 sp1 CD -> recovery console -> fixboot will solve your problem