MS works hard to keep its OS's off of USB external drives, or they could be carried around to any machine.
There is a tutorial on the web to install XP to a flash stick but it is one of the most complicated I've ever seen.
No one has done it with Vista (why bother?) or Windows 7 to my knowledge, although people stop in here all the time and say how easy they could do it.
I think your best bet is to use Virtual Mode XP in Windows 7, or install the program you refer to in Compatibility Mode or otherwise make it work in Windows 7. Or create a standard dual boot on your laptop HD, or on a second HD on the p.c. which can be booted via BIOS boot menu. Dual Boot Installation with Windows 7 and XP