Try doing the same thing you just did, but with the lastest lxml, maybe? You'd likely have to overwrite the existing version in PortablePython/App/Lib/site-packages
I have lxml and lxml-2.3-py2.7.egg.info
directories, one with the module and one that seems to have some installation info on the installed version. I'd try deleting (or moving them somewhere else until you know it works, if you don't have the space to test on a new PortablePython install) them both and place the new version there. I grepped the Portable Python directory and it looks like there aren't any other references to those specific directories that would need modified.