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In fact, I suspect what you're asking is not possible. Even 'network' installs of linux require you to at least boot from a floppy.
A distro that can be installed within Win XP and can be done without a CD or floppy drive has been rolling around in my head for the two weeks since it was posted. mtmtmt's post finally jarred my memory. Knoppix has an install that looks like it can be done without a CD or floppy drive, and it can be done within an NTFS partition. Check out the Knoppix Windows Partition PMI [knoppix.net] from the official Knoppix documentation.
That answers the second half of your question, but you're also asking for something friendly towards a newbe linux user. I'm not sure that this install will be, as it requires a bit of digging around boot.ini. You might be best served by finding a local Linux User Group and having them help you get set up. I've been using Linux for about 3 years, and I'm not sure that I'm brave enough to start messing with boot.ini or a lot of the other Windows config files.
mtmtmt's recommendation of Suse is a good one, and they have a new release coming out soon with some interesting new features. You might also consider Linspire or Freespire for out-of-the-box functionality. If you're willing to do a little more work on your own, Fedora, Ubuntu, and Mepis are good choices. If you really want to dig into the guts of everything, aren't risk-averse, and are willing to configure a great deal more manually, you might try Slackware or Gentoo.
Oops, you don't have a CD reader...
But if you go with Linspire remember that you are always logged in as ROOT.