Sigh! I gave up on making an XP reference machine inside Hyper-V in order to create an install image. I still think it should be possible, if you can makeXP in VM boot from network, for instance.
I did however manage to get XP install done using WDS by using the VISTA WinPE, which is a bit more flexible (it opens a command prompt and then you can run diskpart, format, net use, etc. a really great admin tool actually!).You boot in Vista WinPE, then net use a share with XP install CD/DVD on WDS server and do [Z:\]I386\winnt32. The only caveat is I had to reformat the HD install partition at