Yes. Though with a hard disk of such small size it'd probably just be a good idea to just do Windows 7 and Linux.
Yes. All you have to do is give Linux its own partition.
Dual-boot or multiboot.
you can't, sorry it doesn't allow it you can install Linux distributions on usb though :D
You could put the installation file on the external HDD to install it on another computer but then to install it, it would have to be on a local HDD.
If you are using Windows, the best way is to format it and install Linux. However, if you do not want to do that, download CCleaner (http://www.ccleaner.com/) to clean your system, and then defrag your HDD to increase speed.
You can install Puppy linux by typing "install" when it asks how it should be booted. from there you have options from installing it to LiveUSB, HDD, and many more options. Note: if you choose to install Puppy linux on Compact Flash, make sure a Partition has been created.
Yes. By booting from the Live CD and selecting "Install alongside another operating system", Ubuntu will automatically create a new partition if there is a sufficient empty space in the HDD. Otherwise, the Partitions Manager will prompt you to select the size of the new Linux partition to remove from the original OS.
Windows xp does not have native support for SATA interface (except SP3). You have to download SATA interface driver from the motherboard/computer website and use F6 installation procedure.
windows 7 (clean install) takes up 40-50 GB hdd space and around 400-700 MB RAM (idle)
When selecting the drive you wish to install the OS on, simply select the external HDD.
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If after formatting your going to install WINDOWS XP or an older version then when you run the installer the installer will automatically format the HDD.