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Booting Windows XP From An External Drive

Unlike Mac OS X, Windows XP is not designed to boot from external hard drives. Thus, getting XP to boot from an external drive to be used with your Intel Mac requires some work.
MacRumors user mrichmon reports having installed Windows XP SP2 successfully on an external USB drive using his MacBook to perform the install.
Steps

1. Modify your Windows install CD to support booting from a USB drive. (Instructions on how to modify your Windows XP install CD)
2. Remove the internal hard drive from the MacBook.
3. Connect the external USB drive. Note that some users report that the Windows installation will abort with an error unless the USB port nearest to the power connector is used.
4. Boot from the modified Windows install CD.
5. Progress through the Windows install, creating partitions and formatting the partitions as you see fit. You may want to partition the drive under Mac OS X using a FireWire connection, since Disk Utility cannot always partition USB drives.
6. Wait for the Windows install to finish.
7. Reboot into Windows on the external drive.
8. Install the Apple device drivers for Windows.
9. Replace the internal drive.

Note: Since a key step in this process is removing the internal drive, this process is best suited for MacBooks, since their hard drives are easily accessible. An alternative method for installation in which a few Windows files are stored on a small 6 MB (not GB) partition on the internal HD is available which does not require removal of the internal HD.
After all of this you will be able to boot into Mac OS X. You will not be able to boot into Windows by holding down the option key when booting. Instead you will need to connect the USB drive to a running Mac OS X system, open the Startup Disk Preference Pane and select the Windows partition. Then when you reboot you will boot into Windows. To return to OS X you need to use the Windows Startup Disk control panel to select Mac OS X. Mac OS X will also boot if the USB drive is not connected.

Booting Windows XP From An External Drive - Mac Guides