I would expect this process to proceed to put something on the hdd, but that perhaps the boot process would need some re-working, there likely being some differences in booting hdds rather than usbs.
I've described this in the Wiki => Poor man's install and you'll find there how to boot this install with Grub legacy or Grub2.

With this installation method you can install Knoppix for example on a NTFS partition with Windows7 on it or on a ext3 partition with Ubuntu on it. Windows7 or Ubuntu (my examples) will not be damaged by this "Poor man's install" and when your are booting this install for the first time, you'll be asked to create persistent memory (overlay file - not overlay partition).