Installing Windows XP from USB pen drive

The easiest way:

WinToFlash starts a wizard that will help pull over the contents of a Windows installation CD or DVD and prepare the USB drive to become a bootable replacement for the optical drive.

WinToFlash is freeware and portable.

It is very easy also using YUMI which, although is intended for Linux, also works for other OSes including Windows XP:

If you want to keep the data on the USB pen drive don't check the Format E:\Drive (Erase Content) checkbox.

If you happen to not have the ISO image of the CD you can create one if you don't know how you can create it using CDBurnerXP.

And this is how you do that Copy Data Disc:

We actually did just this recently for an Acer nettop. I found Win2Flash and other USB booting to be extremely slow, unreliable, and ran into numerous problems. As soon as we ordered a $30 external USB DVD drive, it was installed in seconds.

It's entirely possible to do this via USB, but if time / future instances are a concern, the drive is a worthy investment.