Make sure the disk is a fixed size. WinPE has flipped out and would not show a HD unless it was a fixed size, at least for me... (I have had to throw a small dummy file on via dos once or twice to get a VirtualHD to show in WinPE, when doing just a WinPE -->HD install). This issue was resolved for me by using PartitionExpert to both create a partition and format. (
Much quicker as well)
Also, check VPC Bios settings. Shouldn't be anything to change,but you never know what's lurking under the hood...
You may want to use diskpart in a script and the copy I386 folder over to the partition and then run an install w/ the correct cmds to make XP install to same HD where the source files are located.
IMHO, use WinPE for recovery, OOO (Out-of-0S) modifications or remote site op's. There is not much benefit, just more complications and time spent using WinPE for installs. (WinPE and HD recognition, hardware like SATA, nics, etc..unless you make the plug in...)