While posting to the newsgroup today I described some common rules (maybe not rules but thoughts) that might be helpful to follow while creating an image that is to be used in a restore scenario for your device.
In general the idea is simple - you have to go offline to be able to copy over/restore/replace the current XP(e) based OS. This means you want to boot another image of yours [off a XPe or PE bootable CD for instance, or bootable UFD, or from another, better hidden, partition on the same hard drive or from another hidden hard drive, or do a remote boot for a DOS/XPe/PE image, etc.] and be able to copy the *main* XPe image over to the target storage.
Obviously, for wiping out disk you can use delete [CMD's *del*] or format or diskpart or whatever tool you like and/or required by your system security spec (maybe you need to clean every single cluster on the hard disk before the restore).
It may be better to use robocopy for copying files than xcopy. There are other great and reliable 3rd party tools but not free (e.g., xxcopy). Or you can pull the image down from a network if acceptable and exists.
If the restoration image needed to be compressed and/or encrypted (for saving some space or to use an invulnerable encryption) you could always use either one of Resource Kit or PE tools or some other 3rd party tools (freeware is preferable, of course). The cabarc is an example here. Or you can use built-in NTFS compression if the underlying restoration media allows that (e.g., UFD or HDD approach).
Another point should be made about the restore-bootable image itself. If PE used, you may want to remove all the unnecessary extra packages from the image before sysprep. If XPe based, just create a small footprint image with a very limited number of components to support basic operations such as file system operations and/or network [MS or base TCP/IP] and/or whatever custom component dependencies you are adding there. Likely the image should be Minlogon based with either a custom shell or CMD shell. No need to resolve all the platform drivers in that image since you can always disable the hardware wizard and PnP system popups.