You could keep the .iso file (or the install file) anywhere, as long as you have a copy. The .iso file really should be on a CD in case you need to reinstall it at some point. Otherwise, you would need a program that can access the .iso contents to use it. A CD also provides another backup, in case your flash drive or hard drive fails. What you really need is a slipstreamed XP SP3 CD so you can use that with System File Checker to replace any corrupted system files.