I'm having a few problems trying to install Windows XP via an external hard drive. I've formatted the hard drive to NTFS, pasted all the files from the XP CD to the Hard Drive and then tried to boot into after a restart, however, I keep getting BOOTMGR missing press ctrl + alt + del to restart.
Perhaps I am missing something but XP has an issue that it is loading drivers and files during install it drops the USB connection. When the installer tries to read the source USB, it cannot find the drive.
Certainly it is possible to boot from a floppy or something and access an external drive but running setup from the drive has an issue.
I know there were some workarounds posted some time ago and here is one Possible Fix
Windows 7 does not have this issue.