I say USB Key, but there are a number of other buzzwords you can use: key fob, flash drive, thumb drive… the list goes on for a little while.

Things you need:
Computer that allows booting via USB/removable drives
USB Key with at least 1GB of free space – your key will be erased during the steps, so make sure nothing important resides on your device
A copy of Windows XP

After searching for a little bit on how to install XP from an external source, I found this script suite:
USB_MultiBoot_10.rar (10.9MB RAR format). Obviously you’ll need a program like WinRAR to open it.

How to run the script:

1.) Open USB_MultiBoot_10.cmd
2.) Press any key to pass the instructions
3.) Press P – this will load up the PeToUSB.exe (Preinstallation Environment To USB) that will format your USB key to allow it to be bootable. Make sure Quick Format and Enable LBA (FAT16X) are checked. Then press Start.
4.) When you close out of PeToUSB.exe, the command script will continue.
5.) Options – press the option number or letter and then hit enter:
Option 0 should already be set to USB-stick
Option 1 should be setup to point to your XP CD
The other options generally will not be needed/do not apply.
6.) When finished, press C and enter. This will add all the files needed to the USB key.
7.) When finished, try it out on your laptop/desktop
8.) My installation actually had an error – it was missing a flash file DLL, I skipped the error and everything else worked just fine.

I also recommend using nLite or another program to slipstream all necessary files on your Windows Disk BEFORE going through all these steps. But that is not a necessary step.