what exactly do you mean by that "(installed but would not create an image file from Windows XP CD)" ... you can't generate the vm-disk-space for your virtual os ... or the preparation before the windows setup worked and the windows-installation failed?
if your preparation crashes, your vm-ware-disk file hasn't enough space on your hdd, i think the default is just / for the vm-file
in case the vmware server works quite good, two possible reasons for a failure:
a) linux accessed / mounted the windows cd in a wrong way
b) xp is only a recovery cd