For a "portable XP", you can do with a USB flash drive with a minimum capacity of 256 MB. However, with the need to include extra utilities, hotfixes and service packs, we would recommend using at least a 512 MB flash drive.
For our test environment, we used the Memorex 1 GB Traveldrive. Booting XP on an Athlon 1.4 GHz machine via 1.1 USB port took no more then 1 minute and we assume booting from a 2.0 USB port should be even quicker.
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