your grub.conf should look something like this

Im gona try again, YOU CANT CHAINLOAD WINDOWS USING GRUB UNLESS ITS CHAINLOADED FROM A REAL BIOS DEVICE.

Take a look at how ppl boot windows of iscsi storage with gPXE.
First you boot up gpxe it will then hook the iscsi drive as a fake bios device drop an address to it in memory (IBFT), and the first part of windows can now boot, at some time the network connection with the iscsi drive have to be handed over to windows native drivers.

Thats done by windows initiating the network card, and a program called a iscsi initiator reads the IBFT of memory connect to the iscsi drive and windows has now fully taken over the connection.

Without IBFT and the initiator windows would at that point crash because when the windows kernel is loaded any "FAKE" bios drives will be ignored and the system will no longer know where to conteniue from.

Its like having a linux system with kernel and initrd and no root filesystem it wont boot.

then the only other thing i can think to do is to have the ISO extracted to both a FAT32 and a ext3 partition and somehow on boot after the initial boot has happened tell the XP kernel where to find it's setup files, i'm unfamiliar with kernel32 options so i guess it's off to hit the books for me, i suppose you could modify the boot.ini file for the cd image to specify a different root than the initial boot partition

after further investigation, on the XP CD, there is a file called DOSNET.INF EDIT: (/I386/DOSNET.INF), this appears to specify virtual drives, if we could discover the syntax for this, it may be possible to chainload the ntldr on the XP cd and have ntldr do the work of mounting the network filesystem that it can read and thus make t possible using grub to network boot an XP installation

There is no need for caps lock.

It's possible to PXE Boot a CD Image, however you're limited to the amount of RAM you have + the required memory for the CD Image apps and/or OS.

To load a full CD into RAM, nah. Not all Computers tha comes to my workshop has more than 512 MB Ram.
Where you thinking of using "memdisk" on a cd-rom iso?

Possibly. I was also working on some other things at the time of writing that.

also remember that not every PC that comes into your workshop is going to have a NIC capable of PXE and thus you will need to install from a disk anyway, i believe that this thread has gone beyond any truly practical usage and is now theoretical speculation

The latest version of memdisk is now capable of pxe booting ISO images. I have a video demonstrating two different examples of this @ http://www.youtube.com/watch?v=B8q5NtXbBGA. Memdisk is available in the latest syslinux package @ http://syslinux.zytor.com/wiki/index.php/Download. If you have questions, leave comments on the video. Good luck.

it pxe installs Debian from the install ISO

it pxe installs Debian from the install ISO
http://www.vercot.com/~serva/howto/DebianPXE1.html

I have done this already for Windows XP, Vista and 7. For Windows XP i used this guide: RIS for Linux and for Vista and 7 this: Installing Windows 7 with a PXE boot server and this for unattended installations: [Unattended] Successful Windows 7 Automated Network Installation.

of course the other solution that solves OP's original problem is to create USB drives to install the systems

If you have cobbler doing your PXE, its possible to convert live cd iso images to be PXE booted:

https://fedorahosted.org/cobbler/wiki/HowToPxeAnyLiveCd