There are several ways that you can transfer the operating system to a usb drive...but it is extremely dependent upon what type of motherboard and bios that you are using and secondly and most importantly....don't expect it to boot.
A collection of limitations (both hardware and software) currently prevent Windows from booting and running off a USB drive.
There is a work around on this if you are well versed in editing the registry..But for a novice....I highly do not recommend it.
And if your system does not support booting from USB to begin with...the game is over before it starts.
Fred Langa Has a lot to say about it:
Langa Letter: XP On Your Thumb Drive - Windows News by InformationWeek