To keep the introduction short, Microsoft denies that booting Windows off a USB drive works.
Anyway, the web is full of those. I was wondering about the same thing, as i did not want to put a Windows partition on my Linux.based work laptop, and thought it was a good idea to run Windows XP off a USB Hard drive that i just plug in when i need it, and boot from it. To put a long story short, this is exactly what i do now, thanks to the fantastic research of the people credited below. However, it took me significant time to figure out all the painful little problems.
Get a full working Windows XP installation on your bootable USB 2.0 drive
Full tutorial at source ...
Source:
www.ngine.de 
Installing and booting Windows XP from USB drive 
