This is the final screen that shows the error. The USB stick was created properly, the only issue is it is not bootable now.
To fix this, the bootsec.exe needs to be obtained and there are a few places to get it from, which I will not link here.
I think the Win7 DVD comes with the bootsect.exe, but since the Win7 DVD was 64 bit and I was using a 32 bit WinXP VM, it would not run.
My USB stick had the drive letter D assigned to it. So I used the following on the command prompt:
C:/>bootsect_x86.exe /nt60 d: /mbr
Target volumes will be updated with BOOTMGR compatible bootcode.
D: (//?Volume{74be6ce2-bf84-11e2-b27f-000c29d952bf})
Successfully updated NTFS filesystem bootcode.
Bootcode was successfully updated on all targeted volumes.
Note: the back slashes are not showing up so I've changed them to forward slashes for display purposes.
This updated the boot sector for the USB stick and I was able to boot from it and successfully install Windows.
-i