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External Drive with same Win XP installed

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I have done this, but not in the native XP environment. I use Acronis True Image to upsize my XP and W2K Hard drives. I have been able to use it with USB drives if and only if the bios will boot to USB a connection. If not, I have put the new HD in the open case of the PC. You may have to get a power Y connector and maybe an IDE connector if the current one only has one connector. You can also get 2.5" adaptors for 3.5" cables. Acronis, (and several other similar tools) will allow you to create your backup on another drive and the install it to another one after swapping out.

You should also check out BartPE in several different configurations which might help out.
/s/ fbig