I believe you can boot XP ISO
directly from USB without unpacking using grub4dos
. I have done it myself. It is not very straightforward but it definitely can be done. The trick is to boot into grub4dos and then load entire iso into RAM. You will also need an image of boot disk that will act as boot floppy.
If you want to achieve it all in a simple way, I recommend using YUMI, (please do not consider this as advertising). Visit original developers website and download installer. Then all you will need is XP ISO
and a pendrive.
Be careful though and follow instructions precisely as booting XP ISO
is different then generic ISO
boot.
Good luck