This is pissing me off so much, I tried it. I disconnected everything except the floppy drive and one hard disk.

I made the 6 (yes, 6!) windows xp professional setup disks using the downloaded .exe. Windows XP would not install without a CDROM drive present. (as soon as you hit enter to start winxp setup and it inspects hardware, it aborts because it doesn't detect a CDROM drive)

Ok, sys c: from a win98 startup disk, made a config.sys and copied himem.sys and smartdrv.exe then rebooted, loaded smartdrv and ran \i386\winnt.exe and got XP to go on there.

So it can be done from DOS at least.

P.S. Because that worked, I would expect it will also work with winnt32 /makelocalsource because that's exactly what winnt.exe does first. Copies files, reboots, then the setup file copy phase occurs (seemingly redundant but...)