You will have a tough time trying to install from an external hard drive. I believe it will throw up errors at you designed to stop copied XP disks from working. I have looked in the past for ways to do this but they seem mostly to be hit and miss.
If you google something like "installing windows xp from usb stick" there are reams of pages giving answers that range from "its not possible" all the way to "just extract these cab files, re-write these lines, and 3 times out of 10 it may work dependant on your hardware"
I have a 800 series and am running gOS on it and have also run several other Linux distros but that was simple due to most versions of Linux being free they don't mind how you install the OS. Microsoft have been trying hard to make it difficult for software pirates, which in turn, makes things difficult for everyone
I wish you luck, and if at some point I find a way to get this to work (I might be giving another go at a nlite install from USB stick for my PC over the weekend) I will post something up here