You could clone it but then you would need the laptop to be capable of booting from the external drive.
If it only has a 40 gig drive then I assume thats its quite old and so that would be unlikely.
Programs need to be installed to be able to run from the drive they are on, an OS is just another program, albeit a large one,
Thats why you can copy data to an external drive and use it but any programs would need to be installed.