Is it possible to run Winodws XP on USB only? I mean, can the installed OS be portable via USB?
I've noticed that no one has mentioned the MOA project which creates a bootable CD or USB key or hard drive Windows Server 2003 (Windows XP as a Server OS). Search for MOA 2.4.109 to view the process. One advantage is that you can use PortableApps.com software (on the same key, other key, or USB hard drive). I personally have created a CD, USB Key, USB Hard drive (NTFS), and USB Hard drive (Fat32, loses some functionality).
Sure, you can try this:
Check out this guide: http://goo.gl/JJNQs
Refer to http://www.poweriso.com/tutorials/how-to-make-winxp-bootable-usb-drive.htm
Windows In Your Pocket
How to Install and Run Windows XP on a USB Flash or Pendrive