I'm trying to figure out how to get a boot process like the one used on the XP CD, where it unloads the necessary files to a temporary ram disk and then runs setup from there, allowing you to create/modify partitions on installed disks and select a partition for installation.

I've tried simply copying all XP files to the flash disk and booting into dos with using a floppy boot sector, but this method causes the installer to hang at checking or answer files... it seems like the usb connection is lost or something.

Anyway, input appreciated

I have done it before on my USB pen drive. Obviously the PC has to be able to boot from the USB device in the bios. I used loaded ms dos on the USB device, just like a floppy boot disk. If you want to load the files to a temp ram drive you should use load RAMDRIVE.SYS. Using that you can specifies how many kilobytes or megabytes of memory you want to use for the RAM drive